Following is a list of guidelines that might help someone to decide whether to jump into this bandwagon or not :
1.One should invest in stocks only if he/she has extra money. Here I mean extra money means put aside, and forget it.
2.He/she should be able to take risks. Think of your stock account as an crazy account. You may loose all your money. So if you are not kind of that person, better you go ahead with mutual funds or debts.
3.Enterprise / aggressive investor : As per Benjamin Graham's definition, here aggressive means the person who will find time to analyze his portfolio and stock regularly. If you are again a person who is not willing to go through company's results each quarter, then you better off with mutual funds.
4.Love for mathematics and numbers : I would say it's easy to find a good value/growth stock. But most of us always buy it at wrong price. Finding a correct price/fair price also needs you to go through company's balance sheet, finding EPS and PE ratios along with that company's performance. If you don't like doing maths, again investing through MF is a better way.
5.Patience : I believe, 3 to 5 years is good time horizon to invest in stocks. But most of us don't look beyond 6 months, sometimes not even beyond 2 months. Having patience is a must requirement for investing in stocks. Many times, your stock purchases at wrong price will be taken care by Time Factor.
6.Difference between Trader and Investor :
Traders buy at high and sell at low. They do transactions everyday. They bet on P-E ratios and market sentiments.
As an investor, you should “buy at low and sell at high”. You should do transactions may be once in quarter or may be, as someone had said, only few transactions in whole lifetime. AS an investor, You should be betting on company's performance i.e. Growth in EPS (Earning per Share), not on P-E ratio.
If you put simple logic, in no business, you can make profit by buying at high and selling at low. Traders think that they can predict the trend of a stock price and so bet accordingly. As an investor, you should not be seeing at daily price movements.
Graham's advice : Think like this. You are investing 1000 Rs in a good company. Every weekday, Mr. Market (a crazy person) comes to your doorway and tells you that he is willing to buy your stocks for some amount. Some day he tells 2000 rs and some day 500 Rs. If you are happy with price, take the profit, otherwise you ignore him and do your work.
Before you invest in stocks, think that if stock exchange closes down for some time, may be a year or two, are you going to loose your money ? If company you have invested in is doing just fine, then you should be fine. Daily price movement of the company should not bother you. If market offers you good price for buy or sell, then go ahead, otherwise ignore it.
This is the biggest advantage of being a retail investor. “You don't have to follow the market”. Others like Traders and Mutual Fund Managers have to follow the market i.e. If market falls, they have to start selling, if market goes up, they have to start buying. You don't have to do it.
You should bother about your stock investment :
1.when company you have invested is not showing good performance i.e. Losses or lockdown or closing down.
2.When economy is not doing well and lots of roadblocks are there.
Sometimes , May be these are opportunities in disguise, who knows.
Happy Investing !!!
Read about buying guidelines here :
Buying a stock : Step 1
Buying a stock : Step 2
Read about Sensex and Valuations here :
Sensex and Valuations
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