Wednesday, August 31, 2011

Direct Equity Investment

Investing in direct equity can be far more rewarding than you can imagine. This article is a result of an extensive research by presenting an easy to understand content for its readers. Here we have tried to answers almost all nagging question of a novice investor. Happy reading

What it is like to invest in equities?
When compared to any other asset class, investing in equities is definitely riskier and also more demanding in terms of time. However, as it has been said, “higher the risk, higher will be the return”. Investing in direct equities can be far more rewarding than you can imagine and at the same time prove very exciting. World over, and even in India stocks have outperformed every other asset class in a longer run.

So what is investing in direct equity is all about?
It’s all about growth. As equity investor of a company, you become a part owner of that company and hence participate in its growth opportunities and, more importantly, if it’s benefit from the same. Also, “companies are normally able to find tune themselves to the sinking rate of inflation by either in the beginning their price or by controlling costs. Thus, equity since protection towards inflation. ”

To become a successful Equity investor one must follow the following rules:
  • Choose a right company – It is important for an investor to select a right company. This means selecting a company which offers good growth opportunities.
  • Investing in the right time – Time is money, this phrase is most appropriate for equity investment. When you are investing in equity timing is most important. If you are investing for short term ( three to six months) the performance of equity shares is mainly driven by a market sentiments than by company’s fundamentals. The current Investment horizon for a British shares shall be one that allows the investor to take advantage of the company’s growth. Keeping this in mind, the ideal period invested should be greater than five years. One would learn that in the long run, the relevance of the right price diminishes. If you choose the right company And have the right timing and you are investing for a long term it doesn’t really matter whether you what our share at low prices or at high price. This is because When a company goes and you hold its shares the power of compounding we come into action. You’re invested money will multiply and will make the any share investment price insignificant. This is a real Investment mantra.
What kind of returns we can expect from equity, and what are the possible risks
Taking the longer term perspective of staying invested for a period of ten years and more, you can surely expected equity to give return from 15% to 20%.

We have seen from the above study that investing in equity in short term is very volatile and risky. If one decides to speculate they can earn up to hundred percent return in the year. But at the same time as a trader you may lose all your money. This makes it very important to learn the risk return trade off.

But this risk gets substantially reduced for a long term investor (5 to 10 years) and the returns settle at a more reasonable rate of min fifteen to 20%

How I should invest in equity?
One can invest in a equity either directly by buying shares or through mutual funds.

Purchasing shares

The first time the company offers its shares to the public it is called IPO. In an IPO the company sells a certain percentage of its shares to the public at a certain price. Once the shares were issued to the public through an IPO stock exchange’s facilitate the trading of shares in secondary market . therefore you no longer have to wait For the company to issue shares to you but instead you can buy shares from someone who has already been issued few shares of the company. For buying and selling of shares you need to have a demat account. Through a demat account you can trade shares online. the broke will charge you brokerage every time you buy or sell shares.
  • Invest for long term – You must invest in shares only if you have a long term investment goal. Here are some tips to make sure your mistakes are kept at a minimum when you are buying and selling shares
  • Diversify your investments – Do not put all eggs in one basket. As a thumb rule, you should not have more than 10% of your net worth in one stock. Also do not hold in many shares in your portfolio. It is difficult to monitor them. If you want a long-term investor Do not hold more than fifteen to twenty different shares.
  • Invest intelligently – You don’t have to be a genius to be a successful investor. You need to follow few simple rules as a disciplined investor (1) Before you buy a share, write down all the points why you are buying this share; (2) To analyze company’s balance sheets profit and loss accounts and its cash flow statements & (3) If you see that a share is not making money for you do not hesitate to sell it.
  • Short term selling is not a crime – If you have decided to sell a share in short term you must have a good reason for doing it. Tax season in court and consideration in a short term selling. But you cannot completely because your investment decision with an objective to save tax.
  • Resist the temptation to buy a more only because you want to average your cost – Never buy shares of a company just because its prices are falling. There are times when you know that you have bought the company’s share at a very high price only then you shall think of averaging your cost the point of averaging your cost only comes into consideration when you want to hold a share of a company. Do not have that your cost for companies that you want to sell tomorrow.
  • Do not hesitate to correct the mistake even if it means to sell your shares for a loss – There are times when we buy a share and a very high price. But holding on to the share for a long time is even a bigger mistake. selling such shares Is a far more wise decision than holding on to it.
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