Wednesday, August 31, 2011

Why Investment in shares/ Equity is referred as risky?

One fine Saturday morning I was relaxing on my attic a thought just crossed my mind that it will be like to invest my savings in shares and mutual funds. Actually I virtually knew nothing about investment and I was worried that if I am prepared to take this risk. Yes the word that came to my mind was “risk”, almost everybody with whom I discussed about investment in shares & mutual funds only described it as “risky”.

I was very curious to know that why people refer investment in shares and mutual funds as risky. To my surprise almost everyone gave the same answer, “you cannot predict the market price of shares and mutual funds”. I was surprised because if everyone has the same problem then why not any one has come up with a solution.

Actually investment is a matter of money making and I was surprised that in a matter related to everyone’s interest nobody has brought forward a solution. I knew something is remaining unanswered. I tried to discuss with my parents but the reply was more or less or not good enough to satisfy my curiosity.

During those moment of turmoil-thoughts filling my mind I had my hands on a book called Rich Dad Poor Dad by Robert Kiyosaki. Let me tell you that this book had no answer to my question of ‘risks related to shares and mutual funds’ but what this book did to me was to start a ‘school of thoughts’. The school of thoughts were all related to investment of money.

This book gave me a thought-process after which I could start my journey as a qualified investors. One big realization that this book gave me is that, majority of people in this mother earth are financially illiterate. They do not know how to manage their money, they are not aware about the process and power of investment.

This is the reason why majority of us live a life where we are completely dependent on our monthly salary to manage our day-to-day living. We are Financially Dependent. This book gave a goal to my life which it calls as “Financial Independence”.  Why I am behind investment of money, the reason is that “I want to attain Financial Independence”. When, may be in next 10 years time.

By time I finished this book I was almost thirty years of age. Next ten years time means by the time I am 40 years of age I should attain Financial Independence. But while reading this book I have realized that it will be harder said than done. There will be two major bottle necks, (1) As there are few people around me who really understands investment, so I will have to virtually do everything on my own.

No advice and guidance can be expected from anybody. (2) My important question remains still answered that why investment in shares and mutual funds are called risky.
The problem was that I was not able to decide that what should be my Next Step towards investing money. On one hand I do not have anybody beside me as a guide and other hand I want to invest but people call it risky. I was not able to take a wise decision in this situation.

At this point on emotional tenterhooks I decided to go on my own. I decided to take a risk. I had a fear that I will loose my money so I decided to go slow. I decided to invest a small amount of money in shares and see what happens. I immediately contacted my Bank and opened a demat account and a online trading account. By help of my trading account I will be able to buy and sell shares directly from the share market. Demant account is where my dematerialized shares will be saved.

The first share that I bought in those starting phases of my investment life was DLF. This is company that plays in real estate sector. With my very limited concepts of investment, the criteria that I applied to buy this share was very novice. (1) I notes the market price of this share, (2) I compared this price with its last 52W high price, (3) I compared the market price of this share with its book value & (4) I observed who are the competitors of DLF and if I am buying shares of company which is at the top in this business line (in terms of sales/ turnover).

My logic of using these parameters were not sound, but still I will like to share this with you as these are the few thoughts that has helped me cultivate the investment thoughts in my mind. When I was comparing present market price of share with 52W high, I was getting an idea that if at current price levels the share has possibility to go up. To my happiness the 52W high price was almost double than the current market price of DLF. The Book value is another very strong quick-indicator of share valuation.

Book value per share gives an idea that how much a share of a company will be worth during its liquidation. If current market price is less than the liquidation price than it make a share a great buy. The reason being that, the chances of losing money in share which is trading at less than its book value is very small. Comparing a share/ company with its competitor in terms of its sales/turnover value gives an idea that you are buying a established brand name. A established brand name will not vanish in thin air tomorrow.
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