Golden rules for investing in equities

The First Major Axiom: ON RISK
Worry is not a sickness but a sign of health.If you are not worried, you are not risking enough.





The Second Major Axiom: ON GREED
Always take your profit too soon

The Third Major Axiom: ON HOPE
When the ship starts to sink, don't pray. Jump.

The Fourth Major Axiom: ON FORECASTS
Human behaviour cannot be predicted. Distrust anyone who claims to know the future, however dimly.

The Fifth Major Axiom: ON PATTERNS
Chaos is not dangerous until it begins to look orderly.

The Sixth Major Axiom: ON MOBILITY
Avoid putting down roots. They impede motion.

The Seventh Major Axiom: ON INTUITION
A hunch can be trusted if it can be explained.

The Eighth Major Axiom: ON RELIGION AND THE OCCULT
It is unlikely that God's plan for the universe includes making you rich.

The Ninth Major Axiom: ON OPTIMISM AND PESSIMISM
Optimism means expecting the best, but confidence means knowing how you will handle the worst. Never make a move if you are merely optimistic.

The Tenth Major Axiom: ON CONSENSUS
Disregard the majority opinion. It is probably wrong

The Eleventh Major Axiom: ON STUBBORNNESS
If it doesn't pay off the first time, forget it.

The Twelfth Major Axiom: ON PLANNING
Long-range plans engender the dangerous belief that the future is under control. It is important never to take your own long-range plans, or other people's, seriously.

You will find many investors entering the market at high levels and making a quick exit as the market witnesses a correction. Unfortunately, such investors seldom think of investing in stocks again. Thus, they ignore an excellent opportunity to earn above average returns.

In short, investing in equities can be a difficult proposition for retail investors. However, equity must form a part of every investor’s portfolio. The proportion could vary, depending on the investor’s age, monetary requirements, risk appetite, etc.

To cope with volatility, it is important to have a disciplined and systematic approach to equity investment. Set your own rules and more importantly, follow them religiously. Indeed, the mantra for successful equity investment is a well thought-out, disciplined investment strategy.

A long term monetary commitment, adherence to discipline in investment and decisions based on company fundamentals are essential ingredients for successful equity investment.

Here are golden rules for safe equity investment, which could help you to sail through different market scenarios

1. Be a long term investor
This is the first and most important rule of equity investment. Timing the market - entering the market at low levels and exiting at higher levels - is almost impossible. Though often heard on the street, this strategy is difficult to implement, as it is nearly impossible to gauge when the market has peaked and when it has bottomed out. Do not play the guessing game; it is more sensible to put money into the market with a long term commitment.

Trading or speculating seldom helps in equities. You could make quick bucks by trading in 10 deals, but you could lose whatever you have earned in just one deal. This is the risk you take when you try to trade and make easy money from the stock market. Apart from incurring financial losses, it also involves a lot of mental stress. Trading could give you sleepless nights.

Globally, economies follow seven year business cycles of boom and bust. Thus, when you are investing, invest for a fairly long term, say three to seven years. Indeed, it is a proven fact that over the long haul, equities tend to outperform all other asset classes.


2. Invest time and efforts in doing your homework
Investing in equities is not a one time affair. You need to invest a lot of time and efforts, apart from money, to understand industries, economic trends and so on. Further, you should dedicate time to analyse companies, as this will help you to avoid costly mistakes. You need to develop the habit of reading first hand information - such as company annual reports, company announcements and so on. Annual reports of large companies are easily available on the web. Reading business dailies is also a must for equity investors.

Get your basic concepts and fundamentals right. Revisiting financial fundamentals periodically would be a good idea. You need to understand basic concepts like the Price-Earning ratio (P/E ratio), operating margins, earnings per share, etc. Analysing balance sheets and profit and loss accounts is a must. A short term course on ratio analysis would be of immense help.

Further, understand technicalities of investment, like how the stock market operates, how to buy or sell, settlement procedures, etc.

Also focus on domestic economic and policy development. These factors are also of immense importance as they lead to structural changes in the economy that would benefit certain industries. For instance, the boom in the telecom sector in the domestic market is driven by government policy initiatives over the years.

Lastly, you also need to keep yourself abreast with key global developments. With liberalisation and subsequent integration of economies, global factors also impact domestic industries and the stock market.

The stock market is said to be all about sentiments. However, in this mad rush you need to stay focused and maintain a lot of discipline in executing your investment strategy. Thus, irrespective of which way the market moves, you need to stick to your investment strategy without getting swayed by market sentiments.

In short, discipline in your investment approach will protect you from the herd mentality. Most investors are tempted to buy when everyone is on a buying binge and sell when the market is moving southwards. But if you have decided as a rule to buy a particular stock only when the overall market corrects by one per cent, this rule could kill your temptation to jump on the stock when the market is overheated.

3. Pay the right price
It is essential to buy at the ‘right price’, that is, the price that you are comfortable paying. Do not buy because others are doing so. This will help you to hold the stock for a longer duration.

Conversely, when you have to decide when to sell, if you feel that the market is overheated and prices have reached unrealistic levels, exit; Don’t stick on hoping for a little more. It helps to limit your own greed.

4. Portfolio diversification
Diversion is a very old and popular investment strategy, applied to reduce portfolio risk. Actually, before you start investing in equities, you should consider various factors like your age, monetary requirements, etc, to determine how much risk you can take on. For instance, if you are around 30 years old, you can invest a greater portion of your portfolio in equities than a retired person. Once you have determined how much risk you can take on and how much you can invest regularly in equities, try to achieve diversification in your portfolio.

To reduce risk, diversify within equities by investing across sectors. Do not invest in one or two sectors or any negative development pertaining to those sectors could severely impact the profitability of your portfolio.

Secondly, ensure a good blend of small, mid and large-cap stocks in your portfolio. While large cap stocks would lend stability to your portfolio, small and mid cap stocks would give you an above average appreciation. Basically, growth potentials are higher in the case of small and mid cap stocks. Thus, just having large cap stocks could be safe but also mean that returns are just about at the same level as market returns.

Thirdly, invest across value and growth stocks. Growth stocks are risky but also offer higher returns while value stocks are likely to be less volatile.

In brief, when you spread your investments over a larger number of stocks and sectors, if a few stocks/sectors under-perform, this is compensated by other stocks/sectors which perform well.

5. Do not buy on tips or rumors rather focus on fundamentals
Tips and rumors are an integral part of the stock market. Always remember that these could be engineered by a group of traders or punters. Therefore, a sharp rally based on rumors could fizzle out in a short time.

You should strictly stay away from rumors, suggestions or tips received from your broker or friends or the investor circle. Investments based on tips could lead to huge losses. Rather, you would be better off investing based on industry and company fundamentals. Furthermore, generally such tips pertain to small and mid cap stocks, where liquidity is extremely limited. If you invest in such stocks, you could get trapped in an illiquid investment for a very long time.

6. Buy shares of companies whose business you understand
In the long run, the stock market rewards companies with strong fundamentals and good financial performance. Therefore, it is essential for you to invest in companies whose industry dynamics and business models you understand. This will help you to gauge whether a transformation in an industry is positive or negative, at an early stage itself, and its likely impact on the company’s fundamentals. Your understanding of industry dynamics would help you to evaluate industry trends.

7. Don’t sell in panic
Markets go through cycles of boom and bust and volatility is a way of life in equities. Do not sell your holdings in a hurry and panic just because your stocks have witnessed a sudden correction. Always focus on company fundamentals; if they are intact, there’s nothing to worry about.

8. Do not borrow money to invest in equities
It is true that equities tend to outperform other investment avenues in the long run. However, there is no guarantee that you will make money on your stocks either in terms of dividends or capital gains, if your sale of shares is time-bound. Therefore, if you borrow funds to invest in equities, it might be difficult for you to repay the interest or principal on the loan, on time.

What really matters in equity investment is your withholding power. So, invest your surplus money in equities and only invest an amount that you will not need in the immediate future. If you borrow and invest, your withholding power to stay invested for the long term could be limited.

9. Do not marry a stock
If you feel your investment decision has gone wrong, exit the counter; don’t try to average. It is prudent to cut losses, rather than lower the average purchase price. Particularly in cases where the stock is witnessing a continuous sell-off, it is better to offload your position and book losses. You can use the same money to invest in other opportunities.

10. Invest regularly and gradually build up your position
Just as you put money into fixed interest bearing investments regularly, also invest in equities on a periodic basis. Further, do not invest at one go. Rather, buy on a regular basis and in small lots. This will help you to buy stocks at a reasonable price.

11. Monitor your portfolio
Investing in equity is not a one time affair. Buying shares is perhaps the smallest part of the overall investment activity. It is important to periodically monitor and review your investment portfolio. It is always prudent to sell a stock if you feel that the fundamentals have deteriorated and the stock is overpriced in comparison to its fair value. Money has an opportunity cost and by selling an overvalued stock you can investment the same money elsewhere, for better capital appreciation opportunities

Investors basics

Chapter 1: Investing basics
Have you ever wished you could give up your job to live life on your own terms, without having any money troubles? Do you find that your expenses increase by geometric progression, while your yearly raise and bonus increases by arithmetic progression?

Do you find it unfair that the rich seem to grow richer almost effortlessly, while most of us ordinary folk struggle to save even meagre amounts?
If you answered ‘Yes’ to any of these questions, then it’s time to re-think your savings and investment strategy. Investing is not about parking a little money in the bank every few months. It may not be rocket science; but it’s no cake walk either. A good investment strategy needs both, time and money. Why invest? Until a few years ago, it was common for people to stay in the same job all their working lives. But today, unlike in a cushy government job, where one gets pension that has a dearness allowance built in (to take some of the bite off inflation), most people work in the private sector, without any guaranteed job security. Thus, the only way to secure old age is to invest now, when one is young and capable of earning.

For the ‘sandwich’ generation, i.e., the ones who look after their aged parents and take care of their children’s needs today, but can’t depend upon their children to look after them in their old age, it’s all the more critical that they make the most of their earning years and invest for their future needs. If that sounds intimidating, take heart. All you need to get started is a primer on investing. That’s what this book is about. To begin, investment is all about making your money earn you more money. Simply put, it is the practice of making your money work for you, rather than you working for your money. Understanding cash flow When you examine the various entries in your bank statements, you will find that the credits into your account come from one or more of the following sources:
Salary,
Business and
Investment income (interest, dividends, etc.) Now let’s look at where your hard


earned money vanishes each month:
Expenses
Essentials (house rent, utility payments, food, and clothing)
Non-essentials (the new flat screen television, the designer bag or perfume, the latest mobile or other forms of consumption expenditure)
Taxes, over which most salaried people have little control; and
Investments (money spent in obtaining insurance, stocks, bonds, mutual funds, fixed deposits, etc.), which, unfortunately comes last in the order of priority for most people. After this little exercise, you hopefully know where your earnings come from and where they go.

Now, examine your outflows in order of priority. Do you invest first or do you wait until all your expenses are met before turning to investment? If the latter holds true for you, then you would do well to heed the advice of Robert Kiyosaki, author of the bestseller “Rich Dad Poor Dad”. According to Kiyosaki, the secret to getting rich is to pay yourself first (i.e., invest for your future), before you pay others (utilities, shops, etc). Investments must, hence, be foremost in the order of priority barring any financial emergency. That way, you’re sure of saving a particular amount each month; in addition, it may also encourage you to limit your spends within your means. Where to invest? There are so many different investment avenues such as stocks, mutual funds, government bonds, post office schemes, bank fixed deposits, commodities, gold, real estate, art etc., that a regular person might be scared of the whole exercise. If your usual investment strategy is to dash off to the local bank and put your money into a fixed deposit (FD), then it’s time to re-think. There’s nothing wrong with FDs. They are time tested, safe, and in the current interest rate scenario, also attractive. However, if your aim is to create wealth to achieve short-term and long term financial goals (foreign vacation, children’s education and marriage, retirement and so on), FDs lag sadly behind other forms of investment. Although banks may appear to offer attractive interest rates on FDs, the fact is that they often fail to keep up with inflation. Inflation You have heard about it, but do you really know what it means? Inflation is the rate at which the cost of goods and services rises. Simply put, as inflation goes up, your purchasing power decreases. Much like what is happening in the real estate sector now. As real estate prices and interest rates on loans increase, buyers are forced to consider smaller houses in far flung localities. Three years ago, you could have bought a three bedroom apartment in a premium suburb of Mumbai for Rs 75 lakh; today, the same amount will probably get you a one bedroom apartment in the same locality! Thus, your purchasing power has reduced. That’s exactly what inflation does to your savings over time – it reduces the value of your money. Refer to the previous example, where the monthly savings are Rs 10,000. The following table demonstrates how the value of Rs 10,000 varies at different levels of inflation, over a period of time.

Impact of inflation on financial goals This simply means that over the years, you have to spend more in order to maintain your standard of living. What about other expenses like retirement and planning for your children’s higher education? Well, obviously, those will cost dramatically more too. A management course that costs Rs 15 lakh today will cost around Rs 41 lakh (at 7 per cent inflation), 15 years hence when your child is ready for it! In order to meet that expense after 15 years, you will have to block more than Rs 11 lakh today in an FD @ 9%. If you take into account taxation, this figure will be even higher. Hence, even if FDs may marginally beat inflation, this is clearly not enough in the long run, especially for salaried individuals. The following table shows the comparative cost of certain life goals now, and the expected cost after 15 and 20 years, assuming an inflation rate of 7 per cent.

Real return Can you beat inflation? Definitely, but putting your money in a FD is not the way to go about it. To fight inflation, you must invest in a product which gives you not just a higher rate of interest than inflation, but also leaves you with a substantial amount that enables you to meet your goals. If not, you will find that the value of your investment has actually reduced! Shocked? Let’s see why this happens. An investment that offers a return of 10 per cent per annum sounds quite good. But are you really going to earn so much? The answer is ‘No’. You have to factor in inflation to find out your actual earnings. This is called the “real return”. To calculate the real return, you need to subtract the rate of inflation from the stated return. So, assuming an inflation rate of 7 per cent, your real return will be 10 – 7 = 3 per cent. In addition, if you take into account the tax implications, the real return might be even lower. A 30 per cent tax on your 10 per cent interest income would knock off 3 per cent, which is your real return. That doesn’t sound as good, does it? So the next time you have money to invest, keep in mind the real return, and not the advertised one. Thus, you might consider investments such as equities, real estate, and commodities which are relatively insured from inflation, as compared to FDs. Accelerate your earnings: The concept of reinvestment It’s rather simple to make your money work for you. Do you spend the interest you earn on FDs or do you invest it in another avenue, i.e., reinvest it? The simple act of reinvesting the interest earned means you earn interest on the interest and make more money. Isn’t that making your money work for you? Suppose you invested a sum of Rs 2 lakh in the Post Office Monthly Income Scheme (MIS) @ 8 per cent per annum. Every month, a sum of Rs 1,333 will be deposited into your savings account, for a period of 6 years. “Where should i invest such a small amount?”, you may ask. Well, the Department of Posts has a Recurring Deposit (RD) scheme, where you can invest as little as Rs 10 each month @ 8 per cent per annum. Your MIS interest over 5 years would be Rs 80,000. Reinvesting would, hence, earn you an additional interest of 8 per cent on the Rs 80,000, without much effort. Investment avenues such as equities and mutual funds often have a much higher rate of return than FDs and MIS. Imagine how much more you can reinvest. Another advantage of reinvesting is that it can help you reach your financial goals faster. The following example demonstrates how reinvestment over a longer time period can boost your income. Anita and Sunita are 25 years old. Anita invests Rs 10,000 @ 7 per cent (compounded annually) today. Ten years later, Sunita decided she would like to do the same. When they turn 60, they decide to see how much money they have earned. Anita’s Rs 10,000 grows to Rs 1,06,765.81, while Sunita’s Rs 10,000 grows to only Rs 54,274.32! How can the difference be so vast considering that both invested the same amount of money at the same interest rate? The answer is time. Anita begins 10 years earlier and thus earns more interest, which is reinvested, and consequently helps her investment grow exponentially. Hence, your investment needs time and reinvestment of the interest, dividends, and other profits that you get from your original investment. Further, the longer you reinvest your interest income, the higher your original investment grows, and the faster you reach your financial goals. That means, if you plan to save for your retirement, the earlier you begin the lesser you will have to invest to build a bigger nest egg. The following table demonstrates the value of Rs 10,000 invested at 7 per cent over a period of 35 years, assuming that the interest is reinvested.

The power of compounding What exactly is the power of compounding and how can a regular person use it to his or her advantage? Well, to begin with, it goes hand in hand with the concept of reinvestment. Every time you reinvest your income from interest on investments, your capital or principal that is invested goes up. The next time you earn interest, it is on this enhanced capital, and is therefore higher than what you would have received if you chose not to reinvest. Over a period of time, these small extra amounts can add up to a tidy sum. In fact, Albert Einstein, once called compounding the greatest mathematical discovery ever. Apart from time, another factor that influences compounding is the frequency of compounding. You’ve probably heard of investments that offer monthly, quarterly and annual compounding. The shorter the compounding frequency, the more interest you earn, the more interest you reinvest, and the faster your money grows. Taking our previous example of a person saving for his son’s management education, instead of blocking more than Rs 11 lakh today in a FD, he would need to invest approximately Rs 10,900 per month if an RD is available @ 9% (compounded monthly), which is nearly the same as his monthly savings of Rs 10,000. Thus the frequency of compounding has a crucial role to play in investment planning. The following table demonstrates the effect of compounding across different frequencies, for a sum of Rs 10,000 @ 9 per cent per annum for 10 years.

Thus, after 10 years, the investment which was compounded monthly grew by almost Rs 1000 more, than the investment which was compounded annually. Compounding is such a powerful financial tool that if you invest and reinvest your savings and profits regularly, your investment portfolio will steadily outgrow your salary! Now that you have understood the basic tenets of cash flows, inflation and compounding, let’s understand financial planning and its need.

WHAT ARE SHARES,STOCK EXCHANGE,DEMAT A/C ETC.

2 What are shares?
A share is one of a finite number of equal portions in the capital of a company, entitling the owner to a proportion of distributed, non-reinvested profits known as dividends and to a portion of the value of the company in case of liquidation. Equity is a share in the ownership of a company. It represents a claim on the company’s assets and earnings. As you acquire more stock, your ownership stake in the company increases. The terms share, equity and stock mean the same thing and can be used interchangeably.

3. What is a stock exchange?
A stock exchange, share market or bourse is a corporation or mutual organization which provides facilities for stock brokers and traders, to trade company stocks and other securities.

The Bombay Stock Exchange Limited, or BSE has a nation-wide reach with a presence in 417 cities and towns of India. Its index, or market indicator is known as the Sensex.

The S&P CNX Nifty, or simply Nifty, is the leading index for large companies on the National Stock Exchange of India. It consists of 50 companies representing 24 sectors of the economy, and representing approximately 47% of the traded value of all stocks on the National Stock Exchange of India (more...)

4. Who is a broker?
A stockbroker is person who is licensed to trade in shares. Brokers also have direct access to the sharemarket and can act as your agent in share transactions. For this service they charge a fee. They can also offer additional services like advice on shares, debentures, government bonds and listed property trusts and non-listed investment options (cash management trusts, property and equity trusts. (more...)

5. What is a Demat A/c?
Investors who wish to trade in the market need to have a dematerialized, or demat, account. In India, the government has mandated two entities –National Securities Depository, or NSDL, and Central Depository Services (India), or CDSL – to be the custodian of dematerialized securities. (more...)

6. Buying and selling of dematerialised securities
What is the procedure for selling dematerialized securities?
The procedure for selling dematerialized securities is very simple. After you have sold the securities, you would instruct your DP to debit your account with the number of securities sold by you and credit your broker's clearing account. This delivery instruction has to be given to your DP using the delivery instruction slips given to you by your DP at the time of opening the account. (more...)

How can I purchase dematerialized securities?
For receiving demat securities you may give a one-time standing instruction to your DP. This standing instruction can be given at the time of account opening or later. Alternatively, you may choose to give separate receipt instruction every time some securities are to be received. (more...)

7. How to receive income from shares?
We invest in shares to make money – either through a share’s capital growth, i.e. the amount by which the share price increases in value over time, or through the dividends it pays to its shareholders. Dividends are payments made by companies to shareholders from their profits. (more...)

8. How much should you invest?
Asset allocator and other tools…

9. How to make investment decisions?
The stock market has, perhaps, the most exciting investment opportunities for the investor community. At the same time, it could be unnerving and scary. In fact, equity investment has always remained a big challenge, not only for retail but institutional investors, too.

In short, investing in equities can be a difficult proposition for retail investors. However, equity must form a part of every investor’s portfolio. The proportion could vary, depending on the investor’s age, monetary requirements, risk appetite, etc.

To cope with volatility, it is important to have a disciplined and systematic approach to equity investment. Set your own rules and more importantly, follow them religiously. Indeed, the mantra for successful equity investment is a well thought-out, disciplined investment strategy.

A long-term monetary commitment, adherence to discipline in investment and decisions based on company fundamentals are essential ingredients for successful equity investment. (more...)

what is market?

1. What are Markets?
A stock market is a market for the trading of company stock/ shares, and derivatives. This includes securities listed on a stock exchange as well as those only traded privately. Market is a place where buyers and sellers of securities can enter into transactions to purchase and sell shares, bonds, debentures etc.
1.1 Primary markets:
The primary market is that part of the capital markets that deals with the issuance of new securities.
1.2 Secondary markets:
The secondary market is the financial market for trading of securities that have already been issued in an initial private or public offering. In the secondary market, securities are sold by and transferred from one investor or speculator to another