Everyone is talking about the share market. Of how they made or lost money. Even those who have not invested have an opinion.
Meanwhile, those who wanted to get into the market have decided to shun it. That is by far the most detrimental decision you can make concerning your investments. Because, in the long run, stocks give the highest return as compared to any other investment.
So what must you do now?
Here we tell you how to be a smart stock investor. Do note, all the information we provide is based on the assumption that you are a long-term investor who is willing to hold on to the stocks for five years at the least.
What you must do: Enter the market via a mutual fund
What you must not do: Directly plunge in on the basis of stock tips
A friend of mine is an avid stock investor in India. A few years ago, he shifted residence to the United States. When there, he wanted to start investing in stocks in the US but did not know how to start building a stock portfolio.
He began by investing in equity funds.
He selected a diversified equity fund. This is a mutual fund that invests in various stocks of various sectors. He would constantly look at the portfolio and then individually track the stocks and the sectors. He would read up on these stocks and sectors and keep tabs on their performance. Not only would he read the financial dailies and watch the relevant programmes on television, he would also go through a few finance Web sites to get updated.
He would then compare his observations with the way the fund manager handled the portfolio.
He would also look at the portfolios of a few other funds that were performing well to see which stocks they were investing in that his fund had not invested in.
This is how he slowly got entrenched into the stock market.
You can experiment with this option because investing in a diversified mutual fund is a smart way to get into the market. You have a fund manager and his team who will research and pick up stocks.
What you must do: Your homework
What you must not do: Be lazy about your investments
Do you have access to a website? Start surfing.
You can look at Web sites such as Yahoo! India Finance, Moneycontrol, Sharekhan, ICICI Direct, Equitymaster, Myiris and India Infoline.
If you do not have access to the financial dailies, you can even check them online: The Economic Times, The Financial Express, Business Standard and Business Line.
Watch business news on television and and check out the channel, CNBC.
Maybe you could subscribe to a business magazine. There are a number of them in the market: Business India, Business World, Business Today, Outlook Money, Capital Market.
Talk to your friends, colleagues and family members who do invest. Find out which stocks they are bullish on for the long-term and ask them why. Start reading about those stocks and their sectors.
What you must do: Start small but be consistent
What you must not do: Be erratic and keep postponing till you have a 'lumpsum'
Once you get into it, keep a list of stocks you would like to invest in for the long-term. Then, buy them regularly. A friend of mine used to regularly invest in Arvind Mills while another picked on ITC.
Every month, they buy a few shares of the company.
People are always under the mistaken notion that, if they have to buy shares, they must do so with a huge amount. This is not true. In fact, it makes sense to start small but be regular.
A friend of mine who trades online started by buying a few shares on and off when she had the cash. She did this with Infosys. Her first buy was just five shares. She kept buying over the years. When the price was high, she would buy a few. When it was low, she would get more. Over time, Infosys declared bonuses (free shares to the shareholders) so the number of Infosys shares in her portfolio kept increasing.
When you use this strategy, you sometimes buy the stock at a high price and sometimes at a low price. Over time, this evens out.
To see how this works, check out the example in Why you must buy shares gradually.
What you must do: Spread the risk
What you must not do: Place all your bets on one company
Always diversify.
Amongst stocks: When investing in stocks, make sure you do not put all your money in one single stock, however bullish you may be about it. Always spread your investment among a few stocks to reduce your risk.
Amongst sectors: Ensure all the stocks you are investing in are not from the same sector but from different sectors. Should one sector do badly, chances are the others will balance it out. If you invest in one stock only and that fails miserably, you will lose all your money. There is safety in numbers.
Let's say you decide to invest in five shares. And you pick on Cipla (pharmaceuticals), Infosys (information technology), Procter & Gamble (FMCG), ICICI Bank (banking) and Arvind Mills (textile).
The above selection is well diversified between sectors. But, if you had picked up on Cipla, Ranbaxy, Wockhardt (all pharmaceuticals) and Infosys and Wipro (information technology), you would have been focusing on two sectors only and a large portion of your investment would have been in pharma.
My friend, whom I mentioned above, was putting in large amounts of money into Arvind Mills every month. When she put in all the figures in an Excel spreadsheet, she realised it amounted to almost half of her entire stockmarket investments. After that, she began to focus on other stocks and stopped investing in this one stock.
Lesson learnt: keep monitoring your investments.
Amongst mutual funds: If you are investing in diversified equity funds to get started, ensure you have invested in at least two funds from different fund houses.
Amongst type of investments: Finally, don't invest only in stocks. Consider other fixed return investments like Kisan Vikas Patra, Public Provident Fund, National Savings Certificate, RBI bonds, bank fixed deposits.
Also look at debt mutual funds. Unlike equity funds which buy shares, these funds invest in fixed return instruments.
All the best!
Finally, there are two things you must remember about stocks and equity mutual funds.
1. Get ready to stay in for the long haul and ride the ups and downs in the market.
2. While they have the potential for the highest return, they are more risky than other investments. So, however cautious you are, you may lose.
