Wednesday, August 31, 2011

Investment Decision

How to buy share? Market Price of stocks and companies fundamentals are important indicators that can help investors to buy share and make a wise investment decision?

Stock price of a public limited company is almost impossible to predict. The price of stocks is totally dependent on that fact that how desperately people are willing to buy that share. If people are more than willing to buy companies shares, in this case they will pay a higher price than the stocks existing market value. But the question is what creates this willingness?

How to buy share that will be in demand in coming future? Ideally company’s fundamentals should drive the demands, but in reality investors do not think logically during investment. Most investors are dependent on hot tips and advises form others. Whenever a question comes to their mind that how to buy share or which share to buy, they simply log on to their TV screen and try to get a good tip. They are least bothered about checking the company’s fundamentals.

They will simply invest based on speculations as they care least about knowing how to buy share (how to identify and select a good share), which is a backbone of stock investment. Traders often invest like this and also small retail investors. They simply buy or sell shares on basis of price variations of stocks. This is the reason why it is almost impossible to predict the movement of stock prices. It follows no logical reasoning, they are totally speculative movements.

If you will ask a trader how to buy share, he will simply answer that buy a share which is trading at a low value today as per technical analysis. This is a reason why the stock prices are so speculative, price of a share with extremely strong fundamentals can fall dramatically without any reasons if traders decide to sell it. Similarly price of a pathetic company may see a dramatic rise with no fundamentals supporting the rise.

This (speculation) is what makes stock market so unreliable, risky and confusing. Hence a long term investor keeps himself isolated form this speculative nature of stock market and keeps his answer to this question very basic, how to buy share?, his answer is through fundamental analysis.

If stock market is so confusing then what a common investor with long term investment goal should see as a guide?

A new investor who does not believe in speculation but is too novice to do fundamental analysis of a company can follow any of the following type of professionals (who are pro in the line of stock investment) and learn how to buy share:

Strategic Investors: Generally, individuals cannot be treated as strategic investors. Strategic investors are mostly companies with a qualified team. What this team does is to do research of the market and identifies exceptions companies whose shares can be brought at discounted price (a very important answer to how to buy share).

These types of investors generally do not invest with the objective of immediate profit. They are all long term investors. A common investor can keep a track of stocks which strategic investors are buying, one can blindly buy those stocks (but be sure to hold it for 7/10 years minimum).

Institutional Investors: A good example of this type of investor is mutual funds. This is also one great institution from where a common man can get his answer of how to buy share. This type of investors focus on development of a diversified portfolio (minimizing risk) with objective of making short term as well as long term profits. Retail investors like you and me who do have the complete know how of stock market, prefers to invest in direct equity through mutual funds.

Mutual fund rout will be a great investment option is you will ask me on how to buy share. Buying a mutual fund is like buying shares indirectly. Mutual funds manager are expert in their line of business. Retail investors invest in mutual funds to get the benefit of the expertise of mutual fund managers in making sound investment decisions. If one wants to learn how to buy share, then tracking portfolio of mutual funds can give a good insight on shares investment.

Retail Investors (Long term): A informed and experienced retail investor who believes in the advantage of long term investment, often picks stocks of blue chip companies. This is a reason why when I asked my father how to buy share he often said me to stocks of blue chip companies. Picking stocks of blue chip companies are easy and any body can do it without much research.

But an experienced retail investor carefully times the purchase of such stocks at discounted price. Tracking portfolio of such retail investors can be very interesting to learn how to buy share. Stock price of blue chip companies are often inflated and over valued. Timing the purchase of such stocks is very important lesson that needs to be learned by all value investors.
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