Below mentioned are some of the so called golden rules to be followed by every investor or trader before entering and after entering equity market. May be you are in IPO investor or trading delivery based you must not neglect or overlook certain points beofre investing your hard earned moneyu in this most risky platform. Never follow the principal of investment on rumours and others tips , the matured view is that after getting the tips from other you make self asseessment on basis of basic principle and then opt. for it.
Identify your risk tolerance
Young people at the start of their working lives will have a greater appetite for taking financial risk as compared to people at the end of their career who are looking forward to stable income and preservation of capital. These two extremes will exemplify the ability to take equity exposure. The young person is likely to be largely in equities for he can afford to take short-term capital loss in anticipation of higher rates of return from equities. The elderly will be unable to take the risk of capital loss even in the short term as their ability to make back any losses will be limited by time and ability to earn.
Middle-aged people will balance their investments between capital growth and some capital preservation to take care of near needs such as children’s education and consumption.
Categorise stocks
Investing in cyclical stocks, such as those in the cement or steel sector, requires an understanding of the economic scenario, both national and global. An active involvement in the investment is required in order to reap the maximum benefits of swings in economic cycles over time. The stock prices are likely to move through extreme highs and lows, and the ability to time entry and exist will be necessary. Growth investing refers to stocks in sectors where the future direction is clear for the medium term-such as technology. However even here, timing is key, for the stock may do nothing for a long time as momentum builds up and then move sharply thereafter. Defensive investing is that which is done from a long-term viewpoint, where a stock is held on the premise that it will grow consistently and on a sustainable basis over time, such as those in the fast moving consumer goods sector. While the appreciation may, at times, not be as dramatic as cyclical or growth stocks, stocks that constitute defensive investments grow steadily over longer time periods.
Check out technical position
Can you actually sell your investment when you want to? The liquidity of a stock is very important in taking an investment decision, for if there is very little free stock available in the market, buying and selling may well impact the stock price in an adverse manner. It is interesting to see what the price volume relationship is for a stock. So if a stock price is moving up or down on high trading volume, it is more likely that there is real interest in that price movement than if there is very little volume supporting the price move.
Compnay work?
The fate of each stock is tied inextricably to the fortune of the underlying business, and the market’s perception of the future prospects for that business. The industry’s future potential in terms of projected demand-supply is key as is the company’s competitive position in the industry. The business model of the company should be considered, as well as possible future changes, and the ability of the company to sustain growth and momentum well into the future.
Promotors & Management of the company
To my mind the capability and integrity of management is even more important in determining the future viability of your investment. A strong, credible, experienced and shareholder responsive management team is critical for operating and growing a successful company. In the newer areas of our economy, management vision is also of significant importance.
Company’s performance track record
The price earnings (P/E) ratio is the often-quoted measure of a company’s value. This ratio divides the stock price by the year’s earnings, and is useful in arriving at comparative valuation. But the tool that is quite prevalent in professional evaluations is the return on equity (ROE), which is the year’s earnings divided by the net worth of the company. This when compared to the cost of capital for the company allows the investor to gauge the company’s wealth creating ability. Apart from the ratios the investor must also focus on the sustainability of earnings growth.
Company’s valuation?
Two stocks may have the same ESP but different PE’s. This is because ROE may be different and its sustainability may be different. Broadly speaking, the higher the sustainable ROE, the higher the P/E rating. A high P/E does not therefore necessarily imply an overvalued stock. Stocks with high sustainable ROE’s are likely to trade at high P/E multiples.
Know the price target?
Having completed rule 1 to 8 above, and having selected stocks and built a portfolio, it is now imperative to track these investments loosely. One method of doing so is to set expectations, by identifying a target price, and to re-evaluate the stock when this target is reached. Here, it is important to consider opportunity costs. If there is a loss on a stock, should one realise that loss and invest in another stock, which has a greater potential, or should one wait for the loss to turn into a profit. By not selling out of low return stocks to get into higher return stocks, investors miss out on opportunities.
Do you want a professional manager?
Many investors mistakenly assume that they can purchase one or two stocks and they will do well. In the absence of good luck, this can be a dangerous strategy since there is always a risk of a stock declining in value or the business facing company specific problems. The more diversified the portfolio, lower is the risk of one poorly performing stock affecting overall performance of the portfolio. However, a good way of diversifying the portfolio is to invest through mutual funds where the professional fund manager and the rigorous investment process is likely to limit risk while maximizing profit, depending on the risk profile of the fund invested in.