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Buying stocks? 4 points to note!

By Abitha Deepak,
Last updated on: June 03, 2009 14:43 IST
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The key objective of any kind of investment is optimizing wealth-creation. This essentially means the rate of return should surpass the rate of inflation. Else, the actual value of investment made diminishes in net worth.

There are essentially two types of instruments for investment: equity and debt. Though debt instruments or other fixed income instruments like income funds, bonds, et cetera offer consistent returns they may be outdone by inflation in the long run.

The known remedy to make capital surpass inflation is to invest in equity instruments. This helps investor grow their capital much faster and will help beat inflation in spite of sharp periods of decline.

Equity investment refers to the buying and holding of shares of stock on a stock market by individuals and funds in anticipation of income from dividends and capital gain as the value of the stock rises.

Here are the top four factors in your 'points to remember' list:

1. Choose stocks based on the performance of the company

Collate historical data of the company in which you are planning to invest in and check their profit graph. They should be a minimum cap of around at least 20-25% on the returns from the capital invested by its shareholders.

Checking long term helps you assess the true value of the company while a shorter term of 6 months could just be a reflection of market mood rather than the solid foundation the company is based upon.

2. Strike the right balance and stick to it

  • It is essential to take a very disciplined approach towards your stock planning.
  • Be prepared to stumble over unexpected bumps when you start out or for that matter be prepared to be surprised from time to time as the volatility of the market is such.
  • The best results await those who participate in the long drawn out game that last well over a number of years to the tune of 10-12 years to be precise.
  • Strike a balance with your stocks, don't accumulate too many and then again don't invest in too little. A moderate diversification should be the key factor in striking this balance, i.e. perhaps say about 15 should be a good way to diversify for someone who wishes to stay invested in the long term.
  • Understand the companies you are invested in and also keep a tab of the trading volumes of a particular stock purchased. This will help you estimate the percentage of active participation in that stock and is also a test of its liquidity quotient.
  • Have a secure allocation plan in place, consult the experts and avoid temptation to buy too much into one single company.

3. Keep a tab and consistently evaluate the investments

Be in touch with every change that happens with regards to your stocks. During the lean times there might be good opportunities thrown up for the grabbing.

Don't lose sight of those if it makes investment sense for you. Figure out how you buy low at such points in time.

Keep track of the stock worth in order to determine if key elements that prompted you to buy the stocks in the first place are still secure in place or if your earlier expectations have been undermined.

Keep track of the prices on your finance worksheet and subject them to a quarterly and yearly review. This will help you reassess and reallocate according your current risk capacity.

4. Errors are an individual's portals of discovery

Your experience with stocks may be a mixed bag of both good and bad. Store away good pointers from the things that worked for you and learn from the bad experiences in perfecting your investment skills.

Begin the exciting journey of making your every penny count!

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Abitha Deepak,

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