Invest in Stocks
The retail investor typically shies away from investing in stocks as there are more stories of people who lost money than those who made it in the stock markets. When a company wants to raise capital it either takes a loan or goes for a public issue of shares. There are two types of stock: preferred and common. The former is a private placement of the company's shares with corporations like insurance companies, pension plans or mutual funds. These funds are used to pay off debts or for capital expansion.
The stocks that you buy in the market either primary (at the Initial Public Offer) or secondary (those traded in the market) are common stock and mean that you buy up a share in the company and are a part owner. The company will now send you details of the company's general meetings and profit/loss/balance sheets. An investment portfolio should usually have about 15-20% of its total value in stock markets. But this varies according to the risk appetite and how much time a person is able to invest in managing money. The younger you are when you start putting money in stocks the better. If you are nearing retirement then mutual funds are better for you. Stock markets are not for the nervous. An erosion of upto 25% of capital is sometimes possible but the upside could be upto 50%.The investor has to resist the temptation to sell when the markets fall and buy when they move up. In fact the opposite strategy should be adopted - sell into a rally and buy into a fall.
The time frame for investing is important. If the funds are required within the next two-three years then there is a possibility that the networth of the stock portfolio may be lower or only marginally higher at the time the money is needed. In such cases it is better to go for deposits or bonds. You can hand over the funds to a portfolio manager who will charge you a percentage of the profits. But the portfolio manager has his compulsions and he will not take undue risks as he cannot risk making a loss. This means that the profits may not be very high. However your money will definitely earn good returns. A good strategy is to read up information on stock markets and stocks. Follow the stock markets daily. There is a universe of information available on the web and in newspapers. Do not start by putting all your money in the stocks at one go. Get experience with small amounts and only when you are sure of yourself start investing systematically. Do not be fazed by price movements if your research is good and you are sure of the company. And yes, there is beginners luck so do not get overconfident if you make an early killing. Choose the stocks to be bought carefully. Index and large cap stocks are slow to move but are less volatile. Midcap and small cap stocks give good returns but require a lot of patience.
Historic prices of stocks, their 52 week highs and lows are available in newspapers and on the web. Some sectors like metals and commodities are cyclical and go through uptrends and downtrends.
Utilities, Energy, Financials and industry cyclicals are low growth but safe stocks. Consumer goods, Retail and services would be slightly more risky. But the most volatile sectors are Health and Technology. However they are high growth and give the best returns if bought at the right time. Keeping up with news should give a good idea of which sectors look good and which are to be avoided for investment. Keeping track of the economy is important. Some stocks may be down due to a temporary loss in profits even though the company may be a very good investment bet. Others may have been ramped up by operators who are looking to dump them. Learn to recognize the danger signals and avoid such stocks. A stock portfolio should consist of different sectors to reduce the risk. Do periodically evaluate the stocks and rebalance the portfolio. A part of the stock portfolio could consist of stocks to be held with a long term view and should be growth and index stocks which have the potential to be multibaggers giving returns of 100% or more in 3-5 years. Short term and momentum stocks can be held for anything from a week to six months. Such stocks have to be bought with a brave heart and sold ruthlessly even though they may look strong.
Not selling out at the right time could lead to disaster as such stocks can fall to 40% of their price. A stock that may have gained 50% or more is not going to have much upside in the near future. Look for a stock that is going places. Selling a stock within a year of buying attracts Short term capital gains tax and this is clubbed with your income. Selling a stock after a year is charged a long term capital gains tax which is lesser than the above. Keeping a stock for 5 years attracts an even lower tax. The P/E ratio of a stock is the price-to-earning ratio and is the ratio of the price at which it is trading to the earnings the company makes per share. Different sectors have different typical P/E ratios for the shares. For example tech and Pharma stocks will trade at a higher P/E as they have a higher growth rate. The price and value of a stock are different in that the price of a stock may be undervalued or overvalued and if you can find the former there would be an upside in the stock price. Some stocks are good dividend yields. That is, if the sompany makes a profit it may give some of it to shareholders. Sometimes the company may re-invest the profits to expand the company's infrastructure and lead to growth. A good company looks out for the interest of the shareholders. The whole idea of investing in the stockmarkets is to make money as they are inherently involved in share-price movements. It is a lot like gambling but with a calculated risk.
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