1. Not being disciplined and failing to cut losses at 8% below the purchase price A strategy of selling while losses are small is a lot like buying an insurance policy. You may feel foolish selling a stock for a loss -- and downright embarrassed if it recovers. But you're protecting yourself from devastating losses. Once you've sold, your capital is safe.The 7%-8% sell rule is a maximum, not an average. Time your buys right, and if the market goes against you the average loss might be limited to only 3% or 4%.
Again its to be kept in mind, do not to sell a winning stock just because it pulls back a little bit.
2. Do not purchase low-priced, low quality stocks.
3. One should follow a system or set of rules.
4. Do not let emotions or ego get in the way of a sound investing strategy You may feel foolish buying a stock at 60, selling at 55, only to buy it back at 65. Put that aside. You might have been too early before, but if the time is right now, don't hesitate. Getting shaken out of a stock should have no bearing on whether you buy it at a later date. It's a new decision every time
5. Invest in equities for long term and not short term
6. Do not make unplanned investing and starting without setting clear investment objectives and time frame for achieving the same.
7. Not having an eye on what the big players / mutual funds buy & sell is a pitfall and an opportunity lost to pick the right stocks. It takes big money to move markets, and institutional investors have the cash. But how do you find out where the smart money is going? Make sure the stock you have your eye on is owned by at least one top-rated fund. If the stock has passed muster with leading portfolio managers and analysts, it's a good confirmation its business is in order. Plus, mutual funds pack plenty of buying power, which will drive the stock higher
8. Patience is a virtue in investing. Do not panic on your existing stocks. It's so important, we repeat: Be patient for your stocks to reap rewards.
9. Do not be unaware of what is happening around in the market. As always, knowledge is power and in investing, it's also a comfort. Dig for more information other than just the top stories that are flashed.
10. Do not put all your money on the same horse. Diversify your portfolio ideally into five industries and ten stocks.
11. Margin is not a luxury, it is a deep-seated risk, know your risk profile and use margin trading sparingly. You as an investor might lose control of your investments if you borrow too much.
12. Greed is dangerous; it may wipe out the gains already made. Once a reasonable profit is made the investor should get out of the market quickly.
Set your goals right, right at the beginning
Investment Goals.
Investment avenues should always be treated as tools which will generate good returns over a period of time. To take a short term view would be fatal. In the stock markets, prices fluctuate very fast for the lay investor. To get the maximum returns begin with a two-year perspective.
Begin with an understanding of yourself.
What do you want from your investments?
It could be growth, income or both.
How comfortable are you to take risks?
It's only human if your first reaction on an adverse market movement is to sell and run away. To shield yourself against short term trading risks one has to take a long-term view. Renowned experts such as Benjamin Graham and Warren Buffet rarely shuffle their portfolio unless there is some change in the fundamentals of a company. Once you see the kind of returns you can generate over time, you'll come to realize that it really doesn't matter if your stock drops or rises over the course of a few hours or days or weeks or even months. Mutual funds are a good way to begin investing in the stock market. Funds render investment services with professionalism and give a good diversification over many sectors. If volatility is not your cup of tea, then you might consider buying fixed income securities.
Planning and Setting Goals: Investment requires a lot of planning. Decide on your basic framework of investments and chart your risk profile.
Ask yourself: What is the investment "time horizon"? Time horizon is the time period between the age at which you would like to start investing and at the age by which you would need a consolidated amount of money for any said purpose of yours.
One should also find out if there are there any short-term financial needs?
Will be a need to live off the investment in later years?
Your investments could be for retirement, a down payment for a house, your child's education, a second home or just for incremental income to take up a better standard of living.
Make clear-cut, measurable and reasonable goals. Be more specific when you decide your goals. For example you must reasonably predict how much amount of money would require and at what time inorder to satisfy any of the above stated needs?
If arriving at these figures looks cumbersome or daunting, our online interactive calculators will help you figure out your future money requirements. The answers to the above will lead you directly to “The type of investments will you make”.
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Is time on Your side ?
The time frame you seek to invest on, your investment profile and the moblizable resources are interdependent and are not mutually exclusive.
How much time do you want to spend on investing?
You can be active, allocate an hour every day or just spend a few hours every month.
Another important factor is when do you need the money?
To help put all of this into context, you also need to look at how various types of investments have performed historically. Bonds and stocks are the two major asset classes that have been used by investors over the past century. Knowing the total return on each of the above and the associated volatility is crucial in deciding where you should put your money.
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Moblizable Resources
After you zero in on your investments its time to decide on how much money you want to invest. Setting investment goals and checking out on allocable monetary resources go hand in hand. It is necessary to fix your monetary considerations as soon as you decide on the basic investment framework.
Some of your basic monetary considerations could be:-
The amount of initial investments that you can pump in.
The sources for the money that you need for investments.
The foreseeable bulk expense which prevents you from saving or which may force you to liquidate your existing portfolio (this expense itself may be your investment goal).
Money that you need to have as back up for emergencies.
The amount of savings that you can afford to allocate every month on a continual basis for such number of year that you may desire.
Answers to all or atleast the most important of these would logically lead you to where you ideally have to invest your money in, can it be equity, mutual funds or bonds.
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Why Invest In Equities ?
Introduction to Equity Investing.
Many investors go about their investing in an irrational way:
1. They are tipped of a 'news'/'rumor' in a 'hot stock' from their broker.
2. They impulsively buy the scrip.
3. And after the purchase wonder why they bought the stock.
He is a fool to act in such an irrational manner. We suggest a three-step approach to investing in equities.
The moment you get a tip on any stock, get the first hand news immediately. You'll find information on the following sites:
www.icicidirect.com
www.nse-index.com
www.bseindex.com
The news, if any, will be on the sites. Be it announcements earnings, dividend payoffs, corporate move to buy another company, flight of top management to another company, these sites should be your first stop.
Do some number crunching. Check out the growth rate of the stock's earnings, as shown in a percentage and analyze those graphs shown on your broker’s site. You will learn to do it in Chapter II of our learning center under the module named ‘Technical tutorials’. Learn more about the P/E ratio (price-to-earnings ratio), earning per share (EPS), market capitalization to sales ratio, projected earnings growth for the next quarter and some historical data, which will tell what the company has done in the past. Get the current status of the stock movement such as real-time quote, average trades per day, total number of shares outstanding, dividend, high and low for the day and for the last 52 weeks. This information should give you an indication of the nature of the company’s performance and stock movement. Also its ideal that you be aware of the following terms:-
High (high) : The highest price for the stock in the trading day.
Low (low) : The lowest price for the stock in the trading day.
Close (close) : The price of the stock at the time the stock market closes for the day.
Chg (Change) : The difference between two successive days' closing price of the stock.
Yld (Yield) : Dividend divided by price
Bid and Ask (Offer) Price
When you enter an order to buy or sell a stock, you will essentially see the “Bid” and “Ask” for a stock and some numbers. What does this mean?
The ‘Bid’ is the buyer’s price. It is this price that you need to know when you have to sell a stock. Bid is the rate/price at which there is a ready buyer for the stock, which you intend to sell.
The ‘Ask’ (or offer) is what you need to know when you're buying i.e. this is the rate/ price at which there is seller ready to sell his stock. The seller will sell his stock if he gets the quoted “Ask’ price.
Bid size and Ask (Offer) size
If an investor looks at a computer screen for a quote on the stock of say ABC Ltd, it might look something like this:
Bid Price : 3550
Offer Price : 3595
Bid Qty : 40T
Offer Qty : 20T
What this means is that there is total demand for 40,000 shares of company ABC at Rs 3550 per share. Whereas the supply is only of 20,000 shares, which are available for sale at a price of Rs 3595 per share. The law of demand and supply is a major factor, which will determine which way the stock is headed.
Armed with this information, you've got a great chance to pick up a winning stock. Again don’t be in a hurry, ferret out some more facts, try to find out as to who is picking up the stock (FIIs, mutual funds, big industrial houses? The significance of which you will learn in section II of our learning center). Watch for the daily volume in a day: is it more/less than the average daily volume? If it's more, maybe some fund is accumulating the stock.
Next time you hear or read a 'hot tip': do some research; try to know all you can about the stock and then shoot your investing power into the stock. With practice, you'll be hitting a bull’s eye more often than not.
Savings & investment vechicles available.
Personal finances.Why bother?
There is always a first time for everything so also for investing. To invest you need capital free of any obligation. If you are not in the habit of saving sufficient amount every month, then you are not ready for investing. Our advice is :-
Save to atleast 4-5 months of your monthly income for emergencies. Do not invest from savings made for this purpose. Hold them in a liquid state and do not lock it up against any liability or in term deposits.
Save atleast 30-35 per cent of your monthly income. Stick to this practice and try to increase your savings.
Avoid unnecessary or lavish expenses as they add up to your savings. A dinner at Copper Chimney can always be avoided, the pleasures of avoiding it will be far greater if the amount is saved and invested.
Try gifting a bundle of share certificates to yourself on your marriage anniversary or your hubby’s birthday instead of spending your money on a lavish holiday package.
Clear all your high interest debts first out of the savings that you make. Credit card debts (revolving credits) and loans from pawnbrokers typically carry interest rates of between 24-36% annually. It is foolish to pay off debt by trying to first make money for that cause out of gambling or investing in stocks with whatever little money you hold. Infact its prudent to clear a portion of the debt with whatever amounts you have.
Retirement benefits is an ideal savings tool. Never opt out of retirement benefits in place of a consolidated pay cheque. You are then missing out on a substantial employer contribution into the fund.
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Different investment options and their current market rate of returns.
The investment options before you are many. Pick the right investment tool based on the risk profile, circumstance, time zone available etc. If you feel market volatility is something which you can live with then buy stocks. If you do not want to risk the volatility and simply desire some income, then you should consider fixed income securities. However, remember that risk and returns are directly proportional to each other. Higher the risk, higher the returns. A brief preview of different investment options is given below:
Equities: Investment in shares of companies is investing in equities. Stocks can be bought/sold from the exchanges (secondary market) or via IPOs – Initial Public Offerings (primary market). Stocks are the best long-term investment options wherein the market volatility and the resultant risk of losses, if given enough time, is mitigated by the general upward momentum of the economy. There are two streams of revenue generation from this form of investment.
1. Dividend: Periodic payments made out of the company's profits are termed as dividends.
2. Growth: The price of a stock appreciates commensurate to the growth posted by the company resulting in capital appreciation.
On an average an investment in equities in India has a return of 25%. Good portfolio management, precise timing may ensure a return of 40% or more. Picking the right stock at the right time would guarantee that your capital gains i.e. growth in market value of your stock possessions, will rise.
Catch ICICIDirect’s ‘Tips for Stock Picks’ and ‘Portfolio Management’ Chapter II / Module 9 & 10 respectively.
Bonds: It is a fixed income(debt) instrument issued for a period of more than one year with the purpose of raising capital. The central or state government, corporations and similar institutions sell bonds. A bond is generally a promise to repay the principal along with fixed rate of interest on a specified date, called as the maturity date. Other fixed income instruments include bank fixed deposits, debentures, preference shares etc.
The average rate of return on bonds and securities in India has been around 10 - 12 % p.a.
Certificate of Deposits : These are short - to-medium-term interest bearing, debt instruments offered by banks. These are low-risk, low-return instruments. There is usually an early withdrawal penalty. Savings account, fixed deposits, recurring deposits etc are some of them. Average rate of return is usually between 4-8 %, depending on which instrument you park your funds in. Minimum required investment is Rs. 1,00,000.
Mutual Fund : These are open and close ended funds operated by an investment company which raises money from the public and invests in a group of assets, in accordance with a stated set of objectives. It’s a substitute for those who are unable to invest directly in equities or debt because of resource, time or knowledge constraints. Benefits include diversification and professional money management. Shares are issued and redeemed on demand, based on the fund's net asset value, which is determined at the end of each trading session. The average rate of return as a combination of all mutual funds put together is not fixed but is generally more than what earn in fixed deposits. However, each mutual fund will have its own average rate of return based on several schemes that they have floated. In the recent past, MFs have given a return of 18 – 30 %.
Cash Equivalents: These are highly liquid and safe instruments which can be easily converted into cash, treasury bills and money market funds are a couple of examples for cash equivalents.
Others : There are also other saving and investment vehicles such as gold, real estate, commodities, art and crafts, antiques, foreign currency etc. However, holding assets in foreign currency are considered more of an hedging tool (risk management) rather than an investment.
New to investing!
Investing !! What's that?
Judging by the fact that you've taken the trouble to navigate to the Learning Center of ICICIDirect, our guess is that you don't need much convincing about the wisdom of investing. However, we hope that your quest for knowledge/information about the art/science of investing ends here. Sink in. Knowledge is power. It is common knowledge that money has to be invested wisely. If you are a novice at investing, terms such as stocks, bonds, badla, undha badla, yield, P/E ratio may sound Greek and Latin. Relax. It takes years to understand the art of investing. You're not alone in the quest to crack the jargon. To start with, take your investment decisions with as many facts as you can assimilate. But, understand that you can never know everything. Learning to live with the anxiety of the unknown is part of investing. Being enthusiastic about getting started is the first step, though daunting at the first instance. That's why our investment course begins with a dose of encouragement: With enough time and a little discipline, you are all but guaranteed to make the right moves in the market. Patience and the willingness to pepper your savings across a portfolio of securities tailored to suit your age and risk profile will propel your revenues at the same time cushion you against any major losses. Investing is not about putting all your money into the "Next Infosys," hoping to make a killing. Investing isn't gambling or speculation; it's about taking reasonable risks to reap steady rewards. Investing is a method of purchasing assets in order to gain profit in the form of reasonably predictable income (dividends, interest, or rentals) and appreciation over the long term.
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Why should you invest?
Simply put, you should invest so that your money grows and shields you against rising inflation. The rate of return on investments should be greater than the rate of inflation, leaving you with a nice surplus over a period of time. Whether your money is invested in stocks, bonds, mutual funds or certificates of deposit (CD), the end result is to create wealth for retirement, marriage, college fees, vacations, better standard of living or to just pass on the money to the next generation. Also, it's exciting to review your investment returns and to see how they are accumulating at a faster rate than your salary.
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When to Invest?
The sooner the better. By investing into the market right away you allow your investments more time to grow, whereby the concept of compounding interest swells your income by accumulating your earnings and dividends. Considering the unpredictability of the markets, research and history indicates these three golden rules for all investors 1. Invest early 2. Invest regularly 3. Invest for long term and not short term While it’s tempting to wait for the “best time” to invest, especially in a rising market, remember that the risk of waiting may be much greater than the potential rewards of participating. Trust in the power of compounding Compounding is growth via reinvestment of returns earned on your savings. Compounding has a snowballing effect because you earn income not only on the original investment but also on the reinvestment of dividend/interest accumulated over the years. The power of compounding is one of the most compelling reasons for investing as soon as possible. The earlier you start investing and continue to do so consistently the more money you will make. The longer you leave your money invested and the higher the interest rates, the faster your money will grow. That's why stocks are the best long-term investment tool. The general upward momentum of the economy mitigates the stock market volatility and the risk of losses. That’s the reasoning behind investing for long term rather than short term.
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How much money do I need to invest?
There is no statutory amount that an investor needs to invest inorder to generate adequate returns from his savings. The amount that you invest will eventually depend on factors such as:
Your risk profile
Your Time horizon
Savings made
All the above three factors will be discussed in brief in the latter part of the course.
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What can you invest in?
The investing options are many, to name a few
Stocks
Bonds
Mutual funds
Fixed deposits
Others
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