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Understanding The Fundamentals of Shares

You have gone and purchased the stock on the basis of the hot tip given to you by your broker/friend. However before doing that, here are some things you should know about the stocks.

You are a part-owner of the business: When you are buying stocks of a company A, you are actually contributing to the share capital of the company. It means whenever the company makes a profit, you too participate in the company's profits. And when the company suffers a loss, you must also put up with the losses.

Share price can be very volatile in the short term: With the growing attraction of making short-term money, people tend to indulge in day trading. This induces a high degree of volatility in the stock price in the short term. It is better to ignore this volatility and instead focus on the company fundamentals. Invest in quality companies. This will not only protect you against losses but you will earn good returns in the long run.  

 

Stocks are long-term investment: Buying a stock is always for a long term. You should invest those funds that you will not need for another 5-10 years. Always buy when the markets are falling. This will help you get good stocks at bargain prices. Don't buy when the markets are going up. You may end up paying more for a stock.

Plan your asset allocation wisely: Just because stocks give higher returns doesn't mean you should put all your money in stocks. The high returns are due to the volatility inherent in stock market. It is better to allocate a part of your portfolio for debt. So in case, you need money urgently, you can always redeem the debt to use the money.

Stay away from 'hot tips': It is common sense guideline, but unfortunately many people don't follow it. Don't fall for the tips given by your friend or broker. Tips are just lot of hot air with no justification. Instead carry out your own independent research before investing. Also don't copy the investment style of your family and friends.

Everybody is different and can take different levels of risk. Find out your risk-appetite and invest accordingly.

Contributing Writer  I am Laxmi Kasbekar, originally from Mumbai. I have been working as a freelance writer for past 2 years. My specialty is finance and health, though I can write on variety of other subjects too. You can contact me at lax_k@mtnl.net.in



 

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