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A few steps to follow for new equity investors
They stick to these advises blindly without understanding the basic concepts behind the analysis and in the process burn their fingers. Internet boom is another bane which has made the situation worse. There are a whole lot of misleading articles which instils false sense of confidence in the head of new investors and they start behaving like an expert.
Stock markets reflect the whole economic health of a country and you cannot understand its behaviour just by reading few articles from here and there. A systematic approach and knowledge is warranted for the same and in this article we will try to figure out the baby steps required before you start investing in stock market.
First Step - Set your goals right
Fancy goals and short term time horizon rarely pays in stock market. Investments should always be treated so as to generate good returns over a period of time. Price fluctuation in stock market is so fast that taking short term view would be fatal. Similarly, expecting fancy return of 50% on continuous basis is not prudent. Before setting return expectations have a look at the historical return of investment option. Your expectation should be on similar lines. For starters a time horizon of 2 years and return expectation of 15 to 20% can be a good starting point.
Second Step - Learn the basic techniques of the game
Why you listen to stock analysts on TV and follow their advice? The answer is you think that they know something which you do not know. They are experts of the game and you have limited knowledge. I agree and it's true that they are better placed but blindly following their advice is not a good idea. You should try to understand what they are trying to communicate as without this judgement chance of losing money is high. Now the question is how to judge the analysis. The answer lies in two techniques developed for equity investment. Let's understand them one by one:
Fundamental Analysis
Fundamental Analysis is a conservative and non-speculative approach based on the fundamentals of the companies. A fundamentalist has a long term time horizon and is not worried about day to day fluctuations in stock prices. Investment decisions are judged based on three parameters:
1.The overall Economic condition
2.The Industry growth Scenario
3.Individual Company inside the industry
All the above three parameters are of equal importance and should be studied together.
Technical Analysis
Although fundamental analysis will help you select good stocks for investment, it might not tell you the right price of entry. Technical analysis is purely based on the price movement of the stocks. Learning basics of technical analysis will help you decide the correct entry and exit points.
Beating the market experts?
The popular opinion is that individual investor especially the new once have no chance in today's volatile markets. This opinion has strengthened with time just because the investors are not ready to take the pain of learning technical and fundamental analysis. Mind you, the so called experts have in depth knowledge of these two techniques only and there are no other mysterious tools. So you can beat them at their own game if you are ready to make your hands dirty. I have not discussed the tools in details because of two reasons. First, merely two page articles can at the best confuse you and second, I want you to take some pain as the famous saying goes no pain no gain.
Where to start from
In my opening paragraph I have criticized internet as it spreads half baked knowledge. But if you utilize it properly it has immense power. You can get company results, stock prices, volume information etc quite easily which is the starting point of fundamental and technical analysis. You only need a right filter so as to direct you to correct information. So the next thing you need to do is to buy some good books on the topics or start visiting informative websites.
