About Stock Market

Investment basics start with understanding the two most important aspects of the whole game, which are risk and return. It is these two concepts around which every investment philosophy revolves. Return is the gain you wish you make on your investment. It is the opportunity cost you wish you be compensated for, for parting with your money for some time, and for choosing a particular investment avenue over the other. Risk, in its most simple sense, is the chance you are willing to take on an investment. It includes the possibility of losing some or all of your capital investment. But, unlike the flipping of a coin, where you take your chance purely on the basis of your hunch or gut-feeling, risks in investment decisions can be guided by knowledge.

In an attempt to provide you with a one-page beginner’s guide on the subject, much like the ‘how to play’ guide accompanying a board game (‘The Stock Market’ in this case), let me take you through some basic investment concepts:

• Fundamental & Technical Analysis

  These are two different strategies used to analyse stocks for their expected future performance. Investment decisions and stock-picking are commonly based on such analysis.
  1. Fundamental Analysis involves studying the overall economic and company specific factors along with the financial performance of the company to determine the true intrinsic value of its stock. Such value vis-à-vis the price of the stock in the stock market helps determine whether, or not, to invest in the stock
  2. Technical Analysis, on the other hand, is a means of analysing a stock by studying statistics and data derived from the stock market, including identifying trends in price movement, volume change etc.

  Fundamental analysis works best for those seeking to invest in value stocks for the long-term with an intention to make gains out of capital appreciation i.e. increase in the value and price of the stock over a period of time. Technical analysis is more suited to a trader, who buys and sells stocks over the short-term with the intention of making quick gains.

• Value Stocks

  It is important to understand the difference between the ‘price’ and ‘value’ of a stock. It is the difference between what the stock is worth, and what you pay.

  Much like a child’s favourite toy, where the value that he would ascribe to it would easily surpass any price tag at which it can be bought from the market or, the price of onions in times of supply shortage, when the price tops all expectations and the true value of the commodity lies

  On the same lines, value investing aims to find the true value, or intrinsic value of the stock. It is what the stock is actually worth, and not what the market has determined as its price. A stock’s value is a function of its financial performance, its strategic implementations, its growth prospects, and its competitive ability.

  On the other hand, market-determined price is a function of the demand (buyers) and supply (sellers) forces of the stock, with a substantial influence from news, investor perception, uncertainty etc.

• Investment/ Portfolio Management

  Investment/Portfolio management is the professional management of securities (stocks) and other investments (real estate etc.) held by a person, with the aim of meeting his/her investing goals. It involves assessing a person’s risk tolerance, and return expectations, and designing his/her investment portfolio across various asset classes in a manner that meets both the criteria. Portfolio is a term generally ascribed to a person’s investments in stocks.

• Let Knowledge be your Investment Guide

  When entering the stock market to make an investment, you need to be aware of some important considerations, which serve as a guide while building or re-balancing your portfolio of stocks:
  1. Be clear about your investment objective, your timeframe, and your attitude towards risk. The more specific you can be, the better the chances of success.
  2. Keep your expectations realistic. Take into consideration your current circumstances, limitations, and any prospects of change in future.
  3. Determine your asset allocation among various asset classes (stocks, bonds, commodities etc.), depending on your investment objective. While doing so, it is important to decide how much control you want over your investments.
  4. Diversify your investments to minimize risk, especially when investing for the long-term, to enable your portfolio to handle any short-term market fluctuations with ease.
  5. Keep yourself updated and abreast of any changes affecting your investment’s performance and returns.Review and re-balance your portfolio periodically to maintain a match to your risk-return profile.