A few tips for investing in equity to make money grow

Oct 30 2012, 02:02 IST
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SummarySamir had just completed his graduation and was in his first job.

Samir had just completed his graduation and was in his first job. At 22, he had heard a lot from his dad, Vijay, about the power of compounding. Samir now wanted to use this power to create wealth. With no financial responsibilities towards the family, he could use a major part of his salary income for wealth creation.

Vijay suggested that Samir meet a few advisors before embarking on his investment journey. He himself met a few relationship managers from banks, an insurance advisor and also a freelance agent. Finally, Samir met Vish, his father's advisor. While discussing various investment options, Samir asked Vish whether investing in stocks was a gamble.

Here was a young executive forming an opinion on one of the effective methods of wealth creation. As Vish said both ‘yes’ and ‘no’, Samir was slightly confused. Vish now proceeded to explain in detail. If you are going to invest based on tips, rumours and hearsay, it is a gamble.

Also, if you are going to invest based on your gut feeling or price movements (without doing an indepth analysis), you are a gambler. Gambling is not about winning or losing.

It is all about taking a bet, a position, without knowing the outcome of the initial action undertaken. You gamble to win, but more often than not, you lose and you lose big.

Investing is a process, be it in direct equity or any other financial products. Investing in direct equity is akin to investing in a business enterprise. So, before investing in equity, look at the financial health of the enterprise, its balance sheet and growth over various time periods — the larger the better. Also, look at the return on equity, return on investment, dividend yield and/or dividend payout ratio, debt-to-equity ratio and the interest coverage on debt.

The above are only a few of the basic indicators that are used while investing. This is the fundamental method of investing, practised by money managers. At the same time, there is also another method, which the more aggressive investors take— the technical side of investing. Based on various tools as in RSI, Bollinger bands, Candlestick and trend analysis, a person invests in direct equity.

If the rules for each of the above process for investing are not pre-defined by the investor (trader) and he falls prey to his emotions on account of the price volatility, then the difference between

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