Investment in equity market

Most of the time common stocks are subject to irrational and excessive price fluctuations in both directions as the consequence of the ingrained tendency of most people to speculate or gamble...to give way to hope, fear and greed."

-Benjamin Graham, US economist and professional investor

Overlooking Fundamentals

In a haste to make a quick buck from the market, retail investors tend to overlook the fundamentals of the company they're planning to invest in. Some investors buy shares without sparing time to gather the basic information about the company, most importantly the product or service that the company sells and the probable future for that business.

Retail investors get carried away by a management's overoptimistic speeches, tentative expansion plans and are always biased towards short-term play, never wanting to miss the current surge in the price of the stock.

Investors should look at companies that have consistently delivered earnings growth and good corporate governance. Never invest in a firm without understanding the dynamics of the business.

Cheap, yet expensive

A successful investor looks for bargain stocks-the ones which are available for prices lower than their worth and have a strong growth potential. Newbie investors often misinterpret this golden strategy as buying 'cheap' stocks for high percentage gains.

Assume that you can buy a dozen fresh eggs for Rs 36, while rotten eggs are available for only Rs 3 per dozen. If you have Rs 3 in your wallet, will you buy one fresh egg or a dozen rotten ones?

Retail investors look at the share prices of the stocks. They tend to buy cheap stocks, which might not be very valuable.

Returns from your investment in shares do not depend on the number of shares, but the performance of the company. You will have a higher chance of making a profit if you buy just one share of a blue-chip company rather than buying thousands of penny stocks.

Myopic Vision

Retail investors often look for short-term gains. If you want to make a quick profit from stocks, you should have the ability to time the stock market. Stock prices fluctuate wildly over short periods. Your profit or loss depends on your ability to clinch the deal at the right moment. Due to the turbulent nature of stock markets, it is difficult to profit in short time periods.

Retail investors feel left out during phases of a secular bull trend or in times of short-term surges. Retail investors should judge their risk appetite and then take a long-term view. The equity market almost invariably gives a positive return in the long term, in this case a time horizon of at least three or more years will be most prudent.

Also, when you stay invested in a stock for longer than one year, the taxman won't come knocking for his share of the profit. Income from stocks held for more than one year is a long-term capital gain, which does not attract any tax. For investments less than one year, you will have to pay short-term capital gains.

Ignoring a Portfolio

You must have heard stories about investors who bought a company's shares, forgot about them and after a decade or so discovered that they had returned a fortune. While this is an example of how long-term investment is profitable, it's not the best.

If you are among those who think that long-term investment means buying shares at low prices and forgetting about them, you are taking a huge risk. The economic environment and market scenario are very dynamic. Apart from global and local policies and macroeconomic factors, there can also be changes in company strategies or management.

An investor should review his portfolio at regular intervals. If the outlook of a company improves, or at least remains stable, he should buy or hold the stock. When the assumptions under which he bought the shares no longer hold true, it might be time to offload them.

Unwillingness to Book Losses

Investors eagerly cash out small profits on retail investments, but they are often unwilling to book losses on stocks that are sinking. Even when stock prices keep declining, they continue to hold on in the hope that the stock will bounce back and turn profitable sometime. This often results in bigger losses for the investor.

When prices decline, some investors buy more shares in an attempt to reduce the average cost of their stock portfolio. Buying on dips is recommended, but only when the decline is due to a temporary setback and growth prospects remain positive.

Retail investors should stop averaging every second stock unless they have a thorough understanding of the company. They should try to explore of the reasons for its underperformance. Averaging is not a tool to minimize losses but should be treated as a maximization instrument.

When investing in a stock, you should also set a stop-loss instruction for it. When the price of a stock falls to the stop-loss level, the broker will sell them. If you set a stop-loss order at 10% below your purchasing cost, your loss will be limited to 10%.

Entry at Peaks, Exits at Lows

The stock market always overreacts to news, be it while rising or falling. Ideally, the price of a share should be proportional to the total capital and earnings prospects of the company. However, market frenzy results in shares being, generally, overpriced or under priced.

In a bullish market, investors often invest in overpriced shares because everyone else is buying. They become too optimistic and expect stock prices to continue rising. Conversely, in a bearish market, investors become pessimistic and tend to sell shares when they should be buying.

Stock markets tend to take wild decisions in the short run but behave rationally in the long term. Successful investors always base their investment decisions on a shares' intrinsic value and hunt for bargain stocks. They will buy shares of a company with strong fundamentals when it's beaten in the market and sell when prices surge.

Following Tips

Thanks to cheap bulk messages, you might have received a SMS tipping you about a golden opportunity to earn huge profits. If you have acted on any of these tips, you probably have lost some money. If you haven't, you've done well to stay away from such unsolicited mails and messages.

Even solicited tips can do you harm. If you try to find trading tips on the Internet, you will get a large number of websites and blogs that offer you free advice. Don't take the advice on these sites as gospel. It's equally dangerous to buy shares because a friend told you that "its price is going to double in six months. Stock tips by analysts published in newspapers or aired on television should also be subjected to scrutiny.

Always perform due diligence before placing an order with your broker.

Allowing your Broker to Trade

If you just sign the forms on your agent's instructions and allow him to buy and sell shares on your behalf, be ready for a few shocks. Unscrupulous brokers often use this opportunity to misuse clients' money.

Brokers don't get a commission on the profit you earn, but get paid for trade volume. There have been cases of brokers using investor money for intra-day trading without investors' consent. When you get a statement from your brokerage house, you might see your portfolio running losses with a huge amount paid as brokerage.

Perfect plan for child

Becoming a parent may be one of the most glorious feelings in the world, but it doesn't last forever. It's an adventure that needs to be well planned. With tuition fees shooting through the roof, raising a child is not as basic as it used to be. Add to that the aspiration for your child to be the perfect all-rounder-the tennis, music and karate classes-and the costs are likely to burn a fairly large hole in your pocket.

This is where insurance plays a significant role as not only does the market understand these needs, if done the right way, it also ensures you optimize your wealth, secure your child's future and sail through a major part of your parental responsibilities.

As per my knowledge goes around 30% to 40% of the people surveyed wanted to invest in their children. That is because people who traditionally invest in safer options such as fixed deposits and gold tend to ignore the fact that these investments don't come with tax benefits and seldom survive inflation.

It is also found that more than half the people who wanted to invest for their children opted for higher education plans. It is not surprising as, the costs of higher education have risen phenomenally in the past few years.

From IITs and IIMs to private colleges offering diplomas in professional courses and overseas universities, education is no longer affordable. Studies say that the investment in children's plans has grown at twice the speed in the past few years.

While there are many plans such as marriage endowment that parents can choose from, the most sensible and relevant are education based plans. These plans usually offer a money-back policy and include both, the investment and insurance aspects. There are broadly two types of investment plans that parents can opt for.

Unit linked insurance plans

A unit linked insurance plan (ULIP) gives you the option of investing across various schemes such as diversified equity funds, balanced funds and debt funds. The returns in a ULIP depend upon the performance of the fund in the capital market. It is usually the investor who bears the risk in such plans. While investing in a ULIP is a good option, it is not always cheap.

One needs to understand the costs that are involved. Even the amount of money invested is higher than that of a traditional plan. The approximate costs of a children's ULIP is between Rs 20,000 and 30,000 a year. The advantage of investing in ULIPs is that they are regulated by the government. But they are only advisable for people who have a higher propensity to take risks.

ULIPs have certain limitations of how much you can withdraw at what time. The problem parents often face while investing in such plans is that they are unable to predict what their child's future holds. To overcome this challenge, the best way is to take the middle road. Don't keep a conventional three or a five year course in mind. Plan for a course that will last for four years. The maturity benefits will then take care of the goals that you have set for your children. They might even cover costs of post graduation.

Traditional plans

Traditional children's plans, unlike ULIPs, offer money back and endowment policies, which are a safer bet. They are also more basic in nature as they often work as an alternative for bank deposits. But the returns of such policies are relatively low and they do not cover inflation costs as well as ULIPs do.

Traditional plans are best for parents who are not too financially savvy. The risk is far lower as there is no direct investment in the market. There are added advantages to traditional plans as insurance companies also give you the option of bearing the cost of the plan till the date of maturity in case the parent paying the premium dies.

However for parents who don't mind spending their time understanding the pros and cons of all available options, and have the money to spend, the best investment for their children is to build a security basket with investments in different plans such as equities, mutual funds, fixed deposits as well as a ULIP or a traditional plan.

A varied portfolio of this nature comes in handy at a later stage. Like most other investments, children's plans also give you best returns if you start investing early. To me the ideal age to start is by the child's fifth year. Leaving it for later will raise the cost of investment significantly.

Late investment increases costs as the gap between the child's age and college decreases. So you're essentially losing time.

Start planning your child's future and let the joys of parenting take over the stress.