Myths about investing in stocks
Some people always feel that stock investing is more like gambling. But that is far from reality. Stock investing involves a lot of research, understanding of the market and foresight. It may seem seem like a gamble but it is a highly calculated and a calibrated one.
There are many other such misconceptions about the myths about investing in stocks that have stuck around in the minds of public for years. This article will trawl through the list of stock market myths and bust them so that your investment decisions are not swayed by misinformation. Here is a quick and helpful guide to help you know how to start investing in stocks.
Myth 1. Investing in the stock market needs a lot of money
Reality: Most people are of the opinion that investing in the stock market is only for the experienced and the rich. However, contrary to popular belief, stock investing can be done with as low as Rs 10. Technically NSE, BSE, etc. do not have any minimum amount for investing.
To know how to start investing in stocks, you don’t need to be wealthy. You can start investing money in stocks by putting into equity investments with a small capital and then reinvesting your earnings. However, it is important that you ensure you are investing in good businesses at a fair price along with a long-term perspective.
Myth 2. Stock investment helps you make money quickly
Reality: Though many people earn via intraday trading, there is no such thing as ‘overnight money’ schemes in the stock market. Equity investments are considered to be ideal for long-term investors. Therefore, keeping your expectations realistic is more important while trading in stock market.
Myth 3. Investing in stocks is all about timing the market
Reality: Timing the market is not an ideal way of investing. Trying to catch crests and troughs of a stock cycle can be quite challenging and, more often than not, you would end up losing more money out of sheer fear.
By timing the market, you are letting fear and greed rule your judgement, which is contrary to the basic stock investing principle.
Instead of trying to “time” the market, it makes more sense to focus on your investment goals. Being invested is more important.
Myth 4. It’s always good to buy ‘hot stocks’
Reality: This is not always true. Hot stocks may not generate enormous gains over the long run. It’s better to analyse the stocks based on the company’s fundamentals and intrinsic share value.
Stocks that are undervalued or value stocks have often outperformed popular growth stocks at many times.
Myth 5. ‘Buy low and sell high’ is always the right strategy for investing in stocks
Reality: Beginners to equity investment think that ‘buy low and sell high’ is the key to investing. But, price alone is not the factor for stock selection. It is important to study the businesses that you are investing in. Having busted stock market myths about investing, you can now know when to buy and when to sell, which is a critical factor that is more important than the price.
To sum up, avoid being influenced by stock market myths about investing and invest rationally keeping in mind your individual goals and risk tolerance. You can also consult professionals and seek their advice to optimize your investment decisions. If you are a novice in the world of stock market investing, it is a good idea to consult expert opinion and advice through a financial expert who can guide you through the process and familiarize you with trading.
Disclaimer: Investments in the securities market are subject to market risks. Read all the related documents carefully before investing.
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Types of stocks
Everyone wants to create wealth. Stock market is a great place for long term wealth creation .Though stocks are risky, they can offer lucrative returns if decisions of investments are made with reasonable care. Understanding the basics of stock investments such as what are the different types of stocks, how to choose them, etc. can help you manage risk and succeed in stock market investing.Stocks are classified on various criteria. Let’s take a look at some common types of stocks along with tips to choose them.Based on ownership rights✓ Common stocks: Such stocks come with voting rights. However, common stocks are the lowest in priority in the event of company’s liquidation. Therefore, common stockholders do not get their money back until the preferred stockholders and bondholders get their respective shares. However, common stocks usually perform better than preferred stocks and bonds and so there is a possible upswing in the longer run.✓ Preferred stocks: These stocks pay regular dividends to the investors, which is either fixed or set against a benchmark performance. They are also less volatile than common stocks. Tips to choose: Common stocks are easier to trade on the stock exchange. Also, preferred stocks are offered under private placement where retail investors can hardly participate. Since large corporates buy preferred stocks, it is a common way to raise money. Some companies also offer convertible preferred stocks that can be exchanged with common stocks after a point of time. So, even though preferred stock is equity, it works a lot like bonds and can behave like debt from a tax angle.Based on market capitalization✓ Large-cap stocks: These are stocks of well-established companies with a large market capitalization. These companies usually have a valuation of Rs 10,000 crore or more. The large cap or blue-chip stocks, as they are commonly known as, are of large financially sound companies with a steady growth rate. However, they generally do not provide tremendous growth in a short span of time. They usually provide steady growth in the longer run. Some common examples of blue-chip stocks in India are SBI, Bharti Airtel, HDFC Bank, TCS, Infosys, Wipro, ONGC, ITC, Maruti Suzuki, Kotak Mahindra Bank, etc.✓ Mid-cap stocks: These are stocks of companies that have a market capitalization of Rs 500 crore to 10,000 crore. These stocks are however more volatile than large cap stocks and are preferred by intraday traders than long-term investors. Some examples of mid-cap stocks would be Bata India, Colgate-Palmolive, Emami Ltd., Berger Paints, Canara Bank, Godrej Industries, etc.✓ Small-cap stocks: These are stocks of companies that have a market capitalization of less than Rs 500 crore. These are highly risky in nature. Foretelling the fortunes of these stocks is notoriously difficult as the price movements can be volatile. These stocks are usually preferred by intraday traders who use technical analysis to pick the right stocks. They do so in the hope of making a quick buck over a single day. Some popular small cap stocks are Pfizer Ltd., Spice Jet Limited, L&T Technology Services Ltd., Fortis Healthcare, etc. Tips to choose: You need to know which stocks would work best for you. If you are looking for a steady portfolio which does not need to be actively managed, then you can opt for large-cap stocks. If you want high growth along with some stability in the portfolio, then mid-cap stocks are a good buy. And if you are an aggressive investor with sufficient market knowledge, small-cap funds would be a good bet, provided you have done the basic groundwork on the company and the management before investing! Based on price trends✓ Defensive stocks: Such company stocks are unaffected by market conditions. For example, stocks of pharma companies, insurance, tobacco, food and beverage companies etc. perform moderately in all market scenarios.✓ Cyclical stocks: Such stocks get affected more by market cycles and trends and have a particular cycle of operation. For example, stocks of travel companies, automobiles, airlines and hotels etc. are cyclical in nature. Tips to choose: Defensive stocks are preferable during tough market conditions and cyclical stocks can be an option during a booming market. Cyclical stocks are more market sensitive and choosing them at the right time of the cycle is more important.Based on investing style✓ Value stocks: These stocks have some potential but are undervalued compared to their peers. The stock could be underpriced due to multiple reasons like change in management, cyclical, financial distress, investor sentiments, etc. ✓ Growth stocks: Such stocks are in the midst of a growth phase. Price of such shares rise faster as companies ideally reinvest their earnings instead of distributing dividend. ✓ Income stocks: Usually these are the stocks of stable companies who distribute higher dividend and thus provide some stability to the investors. Tips to choose: ‘Buy low, sell high’ is the common philosophy followed for value stock. Growth stocks are best for aggressive investors who are primarily looking for capital gains. Income stocks are relatively less risky can be a secondary source of income. However, these stock prices may witness a huge fall during market downturn. To conclude, it’s important to choose the stock that fits your investment profile. There are lots of factors that need to be considered like market conditions, company fundamentals, tax implications, volatility, etc. that goes into the process of stock picking. Knowing the basics can help you make the right and informed choice. You can also seek help of financial advisers with regard to strategies, individual stock selection and key investment decisions. Disclaimer: Investments in the securities market are subject to market risks. Read all the related documents carefully before investing.
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Why debt investments matter?
While planning an investment portfolio, people often confuse investments with equity. Yes, equity is an important part of an investment corpus, but so are debt market instruments. Just like a well-balanced diet is important for a healthy lifestyle, an investment portfolio needs to have a proper mix of both equity and debt market instruments. With the fall in interest rate over the last couple of years, fixed income or debt investments have become significantly less attractive. However, a smart strategy to creating a healthy investment portfolio is to have adequate proportions of both equity and debt investments depending on your risk profile. Regardless of the economic environment, there are some inherent benefits of debt investments that makes them an integral part of an investment basket. Key benefits of fixed income investments✓ Assured Income: Even as you invest for wealth creation over the long run, it is also important to create a regular source of income. Most bonds pay interest (at fixed rate) on a regular basis which is either yearly or half yearly. You can however opt to reinvest the same if you do not need a steady flow of income. The Indian bond market offers a variety of products to suit various needs. ✓ Stability: Every investment carries some degree of inherent risk. Fixed income investments are less risky when compared to equity investments as they provide capital protection. Since fixed income investments are a debt investment, they work on the basic principle of repaying the amount of money that was originally invested at the time of maturity. This means there is little fear of losing the original capital. Thus, fixed income investments provide a sense of stability to the overall portfolio. ✓ Liquidity: There are various types of debt investments that provide high liquidity. You can choose debt instruments based on your liquidity requirement. For example, liquid funds and short-term debt funds can be considered as short-term investment products. ✓ Indexation benefit: Unlike equity investments, some debt investments provide indexation benefit to its investors if the period of holding is three years or more. This provides significant tax relief from the capital gains. ✓ Diversification: Usually, prices of equity and debt investments move in different direction. Due to the inverse relationship, fixed income investments can be a valuable addition to your portfolio and provide a hedge against equity. Government bonds, private bonds, fixed maturity plans and bank deposits etc. are some of the popular fixed-income investment choices available to diversify your portfolio. It is also important to consider the credit quality, interest rate volatility and economic cycles in a debt market. Here we look into why debt investments matter.Introduction to debt market The Indian debt market is one of the largest in Asia. In a developing country like India, debt market is an important source for raising finance. ✓ The Indian government raises money for all their developmental activities through the debt market. In order to finance various developmental activities, the government (both central and state) issue bonds to borrow money. Government securities are issued by the Reserve Bank of India on behalf of the government. ✓ Debt market can also help control inflation. A reduction in the interest rate for government securities increases liquidity in the market as investors reduce buying bonds. The opposite holds true as well. ✓ An efficient debt market helps in effective mobilization and allocation of resources in the economy. Investment in debt market mobilizes the idle household resources which would otherwise not be a part of the money in circulation. With a rise in interest rates, the idle money can be put to use, thereby increasing the government’s corpus. Thus, effective mobilization and resource allocation leads to economic efficiency and growth. To sum up, there are various benefits of debt investments. For one, debt market offers various investment opportunities. Debt investments play a vital role in building a well-balanced portfolio. Irrespective of economic conditions and market trends, it is important to have an ideal mix of stocks and debt investments based on your investment objective and risk profile. Disclaimer: Investments in the securities market are subject to market risks. Read all the related documents carefully before investing.
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