Investing may not be rocket science, but it does require basic understanding. First and foremost, it is important to understand yourself as an investor, before selecting the right investment options. A portfolio that is just right for you may not work for someone else. This is because each individual has a different attitude towards risk.
Further, each individual has a different set of financial goals depending on which stage you are in in your life. Thus, while it is correct to state that everyone has a different investment selection philosophy, the ground rules for sound investment selection remain the same. They are:
Understand your risk tolerance
This is the first and foremost step of investment. Know yourself, your risk appetite before taking the next step.
Identify your financial goals
Different life stages demand different life goals. For instance, if you are just beginning your investment journey, you may have a short-term plan of going on a family vacation. Your medium-term goal may be to buy your first home a few years down the line. Finally, you may also want to save for your retirement that is 30 years away. This can be classified as a long-term goal. For each of these goals, you need to plan differently and may have to invest in different financial products to meet each of these goals. This process of selecting various investment options based on your financial goals is called asset allocation.
Diversification is the key to success
While investing, you do not want to put all your eggs in one basket. The key to success is to diversify. But diversification too, has to be according to your risk appetite. You may thus wish to diversify among different asset classes such as equity, debt, real estate and commodities. This is called vertical diversification.
You can also diversify within the same asset class. This is called horizontal diversification. For instance, if you are investing in equity mutual funds, you may want to invest in a combination of large cap and mid cap funds to spread your risks. Similarly, if you are investing in debt funds, you can choose fund with varying durations. The duration of the fund, determines the level of risk in a debt fund.
Avoid what you don’t understand
Do not go overboard in your effort to diversify. At all cost, stay away from financial products that you do not fully understand or know the specific risks they entail. Consider high risk or complicated products only when you have the raequisite knowledge.
Keep monitoring your investment status
Once your portfolio construction is complete, you need to keep a watch over it to ensure your investments are meeting your financial goals. It is always best to review your portfolio at least once a year. However, don’t keep a tab on your investments on a daily basis. That’s because you may be tempted to act every time markets move unexpectedly. Such decisions may work over a short period but may not help you meet your long-term financial goals. Remember that volatility is part and parcel of the market movement, and you have to accept this fact if you are a long-term investor.
The bottom line is that there is no one “right” way to select investments. But so long as you are focused on your financial goals, these ground rules should hold good under any circumstances.
Disclaimer: Investments in the securities market are subject to market risks. Read all the related documents carefully before investing.
When it comes to investing, a key ingredient to success is diversification. Simply put, it is the act of reducing risk by distributing resources among various financial instruments. Diversification can happen not only within a single asset class such as equity, but can also be achieved among various asset classes. For instance, retail investors may consider investing commodity besides equity and debt. Unlike popular perception, investing commodity is not as complicated or risky and offer immense potential for market-savvy investors. Basics of investing commodity To understand what are commodities investments, let’s look at how commodities are classified into five broad sectors: ● Agriculture● Metals and materials● Energy ● Services● Precious metals Each of these categories have different commodities under their heads as explained below: Where does trading happen? Now that you know what are commodities investments, it is a good idea to know there are three main exchanges where you can trade in commodities. These are the National Commodity and Derivatives Exchange (NCDEX), Multi Commodity Exchange of India (MCX) and the National Multi Commodity Exchange of India. All the three exchanges have a national presence and electronic trading and settlement systems and can offer benefits of investing in commodities. Investing in commodities made easyThere are a host of equity traders who have a well established presence in commodities as well, and offer trading facilities through the internet platform. If you are new to trading, you can also check the list of brokers registered with the above exchanges to make a final choice. You can begin trade by entering into an agreement with the broker and undergo the normal Know Your Customer (KYC) procedure. Besides a bank account, you will need a commodity demat account from National Securities Depository Ltd. You will need to pay your broker a percentage of the contract value. For different commodities there will be different brokerages. It will also differ on the basis of transaction type meaning trading or delivery. However, it cannot exceed the maximum limit as specified by the commodity exchanges. Pricing and contracts in commodity trading There are two types of prices in commodity trading: spot and future. ● Spot price is the price in which one buys and sells a commodity on the spot ● Future price is the price of the same commodity at a future date. A futures contract is thus an agreement to buy or sell a stipulated amount of a commodity of your choice at a certain price on a future date. On this date, the commodity being traded (type and quantity) must be delivered at the contracted price, irrespective of a rise of fall in the market price. Trading in commodity futures is done on margin. This means, as an investor you have deposit only a fraction of the futures contract with the broker. This provides higher leverage and the option to reap higher returns. Cash or delivery settlement mechanism A contract may be settled through a cash or a delivery mechanism. If you want a cash settlement, you must indicate so at the time of placing an order. Else, if you wish to make a delivery, you need to have the required warehouse receipts. You have the option of changing this mechanism as many times till the expiry of the contract date. How does a transaction take place? A transaction is made electronically between the brokers of both the buyer and seller of a commodity. Both parties enter into respective obligations. While one party decides to purchase, the other decides to sell. The buyer is obliged to take delivery and pay for the commodity for the ascertained price, while the seller has the obligation to deliver the commodity on the said date. Both the buyer and seller can however absolve themselves can absolve themselves of this obligation by offsetting their trade before contract expiry. This is what most speculators do to make gains by speculating on the direction of the price of the commodity. How is commodity trading advantageous? The right mix of commodities in your portfolio can help your portfolio as they are an excellent means of diversification. For instance, gold has a low co-relation to equities and will typically provide gains when equities are down. You could also consider mutual funds investing in commodities to add to your portfolio. Further, as commodity prices determine inflation, investing in commodity futures may be used as a hedge against inflation. However, it is imperative to understand the risks involved in commodity trading before taking a leap. Disclaimer: Investments in the securities market are subject to market risks. Read all the related documents carefully before investing.
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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