The tips about investment that one must know

Investment in equity market is an art and a science and it is not as easy as it may seem to make money in this market. Here under are given some principles of the market:-


(1) You need a broker to invest in equities. We are moving to a paperless wold and to invest we are to open a demat account. India already has about 10 million such accounts.


(2) Movements in a stock market are caused by rational investors responding quickly to the news that may affect their stocks. As a result, the theory starts that it's not possible to outperform the market by using any information that the market already knows.


(3) The risk is less in index stocks as they are well researched and leaders in their sector. On the other hand, investing in companies with evolving business models may give better returns over the same period. So, it is better to keep your eyes open to other stocks too.


(4) Stocks trading below their book value are cheap. But book value can not be the only criteria to pick a stock. In companies with large intangible assets, book value does not tell much about the price. However, in commodity stocks as most of the assets are tangible, book value can be a criteria.


(5) Investers usually think price to earning ratio (P/E) of a stock as a single reflection of how cheap or expensive a stock is because of the simplicity of the strategy and from this come the "theory" that stocks with low P/Es are cheap and vice versa. P/E alone does not tell much about the pricing of a stock and should be seen with other fundamentals like the risk factor involved, company's performance and growth potential.


(6) Penny stocks by nature are low priced, speculative and risky because of their limited liquidity. Chances are you make a high fortune from these, keeping in mind its high volatility, but you should also be prepared to lose all the money parked in. So, it is a wrong notion that penny stocks make good investment. In fact, investing in penny stocks is a very high risk strategy. History has shown that most investors would have only lost by investing in penny stocks.


(7) Timing the market is a common strategy among investors. However, there is no ideal way of smart investing by which one can time the market. Timing the market means forecasting and that should better be left for astrologers. If you have done your valuation studies, you should not worry about the timing of market.


(8) Fixed income avenues are often chosen by senior citizens, as this provides a safe and steady flow of income, keeping in mind their low-risk appetite. But also keep in mind that your aim is to make profit after factoring in the rate of inflation, which, not too long back, was hovering around 7 % level. Investing in equities may be a little risky but it also gives much better returns. In today's world, it is not advisable, to go with a zero-risk policy as one needs to take care of returns also.


(9) Diversification also helps, but in falling markets most often than not, almost all stocks will take a hit. Diversification is a virtue but if it is done only for the sake of it, it may become a vice. In fact, if you are not sure, it is better to focus on a few companies in which you are comfortable irrespective of what sector they belong to. This should be done by taking into account the fundamentals, past performance and future outlook of the company as well as its sector. Diversification helps only when it is done without compromising on the attractiveness of the stock being selected. While diversification does not ensure return on your investment, it reduces the risk that is carried on such investments.


(10) Volatility is the culprit. On the contrary, there are always some excellent opportunities in a volatile market. How can one possibly make profit in a stable market ?
what is needed is the understanding of the situation. Down-trending market shift money rapidly to new sectors. So volatility is a culprit when leveraged. In fact volatility can give good opportunities to buy or accumulate stocks.


(11) There are certainly concerns about the impact of the rising rupee, and results of India's software titans indicates how will they have been able to cope with it. Concern over the rupee leads to a slide in software scrips.


(12) The fate of the Indian markets will depend on whether India can continue to maintain its 8-9 % growth. India appears to have hit a sweet spot with investment and savings rater in the 34-35 % range, hopefully paving the way for years of sustained growth.


(13) It is the old adage that retail investors prefer small and midcaps. Either the trend is for retail traders to prefer frontline stocks (possible through the F & O route), or for institutional money managers to find comfort in small cap stocks. The truth is some where in between.


(14) One should stick to quality and beat volatility. Sometimes, the markets simply does not offer any investment direction. Be it corporate results or news about drought or industrial production figure, all there factors could have changed the course of the market for good or bad. But the impact of these factors is not going to last forever. That is why investors are better off sticking to their investment decisions, rather than changing them according to market mood. Money can be made only on one's conviction, not by following people's recommendations blindly. That is one reason why one would be better off sticking to the golden principle of buying stocks with strong fundamentals and holding them through the volatility. This may sound predictable, but buying quality stocks and holding them is the only way to make money in volatile conditions, One should also be wary of stocks that are part of "momentum pack ". If one get into one of those stocks he should be prepared to face higher amount of volatility.