Investing in stock is always a challenge, as many factors come into play before deciding which stock to invest on. Some of the important factors to consider before investing into stocks are:
- The most important aspect is the investment appetite based on their earnings and what part of their money they are ready to keep aside to invest on stocks.
- One’s ability in taking financial risks and decisions.
- Investor must have a decent knowledge about the stock market and should research and keep a track of the listed companies before getting to invest on it.
- The investment should be made after a complete study of the buyers and sellers in the market. At every price there is buyer and a seller. So the availability of buyer and seller is very important as it ensures liquidity.
- Investor can choose to have a short term or long term perspective, it depends on how mature or less mature you want your stock to get. Most likely for a good stock to move up, it takes time.
- Investing with borrowed money can be a risky practice. The people who borrow money from highly leveraged investors often end up on the losing side because of the inability to withstand the fluctuations of the market and the pressure to pay back the borrowed sum.
- One should abstain from investing in penny stock as most investors do not get the value of investment and also at times cannot exit when they wish to. So the best practice is to invest in fundamentally sound companies with good knowledgeable promoter and the one making decent profits.
- Investors profile is the key: As some are active and others are passive.
- Passive and long term investors must also periodically review their portfolio.
- Timing of the investment
- Knowing when to exit or sell
- Not to be speculative and invest in liquid stocks.
- If in case, the investment is done via brokers, proper diligence of intermediary is a must. And if the investment is made on basis of a recommendation then it is imperative to validate it, as there are many who would recommend dumping the stock.
- The investor must mitigate/reduce their risk by investing in as many stocks as possible instead of picking up a few.
- Concentration risk can lead to losses depending on which sector or industry they belong to or what the govt. policies are in that sector
- One must fully devote time to this activity if one wishes to be an active investor.
- Those who are passive and cannot devote much time can invest through mutual funds. As after the Franklin Templeton fiasco it is important to evaluate the scheme and the fund house in which one needs to invest in
- Investment has a direct correlation with reward and risk. It is very important that investors must evaluate the risk and rewards equally from their own finances and ability to take risk accordingly.
- A new investor must do shadow / dummy investment to enhance their knowledge of market and the company.
- It is best to stay away from speculative trades and investor should be prepared to stay invested in stock for medium or long term as most the stocks require time to mature or to give good return
(By S Ravi, Former Chairman of Bombay Stock Exchange, Managing Partner Ravi Rajan & Co)
