Beginners Guide of Investment in Equities
Studies have shown that investing in the stocks give highest return in long term compare to debt, FD, mutual funds and other Investment vehicles. But still more than 50% of the general people stay away from stocks and they feel safe to put their hard-earned money in other investment areas other than stocks. Yes, of course, stock market has its own ups and downs but investment in good stocks over a period of 5 years is safe and rewarding investment option.
This article is a ready reckoner for your investment in stocks.
Step1: Check your financial risk ability
Our financial risk taking ability depends on number of parameters, like- our type of income sources, no of family members, our liabilities and asset valuation, etc. First check your financial risk taking ability. If your financial fitness allows you to invest in equities for long term , then only follow the other steps otherwise stay away from stocks until your financial position becomes better.
Step2: Educate yourself
You should have basic knowledge on stock before investing in this field. There are numerous free educational materials on internet. You can check Investopedia and any top most investment website to educate yourself on basic knowledge of stocks. Here are links of some good courses on stock market investment :-
Value Investing Bootcamp: How to Invest Wisely
Stock Market from Scratch for Complete Beginners
Step3: Open a brokerage account
Then open a demat and trading account with a good registered broker. Try to select your broker from the top 10 brokers of the country. Opening account with one of the top brokers will ensure you good service and proper guidance. The other benefit is that the research group of top broker companies regularly publishes fundamental research reports on different stocks exclusively for their clients and these reports are good sources of getting idea on long term investment in stocks.
Step4: Find out the stocks for investment:
Being a beginner in stock market, you may have no knowledge on different stocks. You can consult your financial advisor/broker for the stocks to invest in. If you are going to do it your own then it’ll be wiser decision to find out the stocks of the main index of your country. The main index of a country comprises only the best stocks of the country and it get revisions periodically.
Write down the stocks in a page along with their industries. Normally, the main index of any country contains 30-50 stocks. You can’t invest on all the stocks because an optimum portfolio should not have more than 20 stocks. As a newbie, you should start your equity investment with maximum of 5 stocks.
Step5: Select stocks as per your choice from the list
There are numerous factors of choosing the stock for investment. When you’ll be an experienced investor, you can find out your own selection criteria. But as a newbie, you can follow a simple rule of beta.
First select the industries as per your choice. In this area, you can choose the promising and stable industries as per the economic condition of the country. Then identify the stocks which are already in index and also belong to the selected industries. If any industry has 2 or more stocks then use the rule of beta.
Beta simply measures the volatility of the stock compare to the index. A stock with 1.2 beta indicates that the stock is 20% more volatile compare to that its index.
You’ll get the beta of each and every stock in google finance while searching with their short codes. If you are conservative investor then choose the stock with low beta, average one choose beta nearly equal to 1 and aggressive investors can choose high beta stocks for investment in stocks. The problem associated with high beta stock is that as it is more volatile than index so the return and loss both will be greater on these stocks.
Step6: Don’t invest your money all at a time
Allocate a certain portion of your money from savings for investment in equity. Then invest slowly that money into different stocks. Don’t invest the whole money into one stock at a time. Invest slowly and take the advantage of every down movement of the stock.
Step7: Make regular investment
Investment is not the one time business. It is a habit. Allocate certain portion of your surplus fund for different type investment in each month. First make a budget and keep enough space in the budget for emergency fund, insurance and investments.
Regular investment will help you in two ways. First, your major financial obligations/goals will not be a big burden for you. Secondly it will control your spending behavior as you need to set aside a certain amount of money from your monthly income every time.
Step8: Check your investment regularly
Last but very important step is to review the investment periodically, may be twice in a year in case of long term investment. Check your stock portfolio and find out whether the percentage of investment is evenly distributed among different sectors/industries or not. Don’t give emphasize on any particular industry or sector.
If any stock price rises abnormally in a particular year then sell some portion of your holdings of that stock and invest in others. Because every stock has its ups and downs so after an abnormal long run, it is natural that stock should take a time to correct itself. It doesn’t mean that the company position has become poor and one should not invest in that stock. But it is a wiser decision to give that stock price to correct itself and then invest on lower price.
Follow the above steps and I am sure that you’ll get good return from your long term investment in stocks.