New to investing? Read below several tips and tricks to help you get started.
a) At the outset, one needs to realize that there are no set patterns or rules for investment. Investment decisions depend on the circumstances, market conditions and can also change with the risk-tolerance levels of investors,
b) The exact working procedure of investment procedures needs to be properly understood before an individual can take investing decisions. All details of investment transactions should be well-understood too,
c) Investment targets and desired rates of return need to be laid down at the start itself. This facilitates easy formulation of investment policies, including the amount of money to be invested.
Once the above tips are followed properly, a new investor needs to follow the following broad principles (as advised by most financial planners):
a) Stock Values are more important than Stock Prices à While low-priced stocks are attractive, one needs to examine the cause of the low price levels of any stock. Indeed, in a bullish market, the perpetual low prices of a stock might indicate that the company that is making financial losses,
b) Consider the Return On Net Worth à Return on net worth is obtained by dividing after-tax profits by the net worth. Rising levels of return on net worth of a stock make it a suitable channel of investment,
c) Risk-diversification à In order to avoid huge losses at any time, one needs to hold a mix of low, medium and high-risk stocks. This diversification of risk helps in protecting the invested amounts,
d) Stock-price Analysis à one needs to understand the mechanism via which stock prices are determined. Future market expectations and projections regarding market conditions play a large part in determining stock prices,
e) Tax-paying companies à an investor has to understand the financial health of a company before (s) he invests in its stocks. A company that pays high tax levels generally has high levels of profit, and is of sound financial health, compared to those that pay little, or no, taxes. Hence, one should invest in stocks of high tax-paying companies,
f) Analysis of the Free Cash Flow à The reported profits of any company can be divided in two parts: Cash actually flowing in the company and alterations in the profit and loss account of a company (via an increase in the number of debtors). While investing, investors should prefer stocks of companies that have greater portions of profits going back in its own reserves,
g) Optimization à Often, beginners make the mistake of trying to maximize returns by investing in excessively high-risk stocks. This is uncalled for, and one needs to try to optimize one’s return, by holding a mix of different types of stocks,
h) Future prospects of a company à While past performance of a company is extremely important in determining the value of its stocks, what is even more important is its future prospects. The prices of stocks are, more often than not, determined by the future prospects of the company. Such prospects, hence, should be considered more important than past records,
i) Investing in equities over time à In order to obtain the best return from equities, one should avoid investing the whole amount at one time. Investments in equities should be done at different suitable times and market conditions.
These tips regarding investment, as suggested by professional financial planners and advisers, should help beginners understand the basics of investment and then, to optimize their expected rates of return.
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