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It pays to understand investing!

Last updated on: November 30, 2010 11:07 IST

It pays to understand investing!

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Abitha Deepak, BankBazaar.com

Investing is thought to be a job for a highly qualified, trained and veteran professional who has seen the ups and downs of markets, and has come out of the downs in green.

Complex valuations, insider news, contacts with large investors, high value trading, etc. are some thought-to-be pre-requisites for one to make money in the markets.

If you are the one who has links to the latest buzz in the market before anyone else, then you are gifted with profitability and success.

But for a moment let's try to think of just one question - Is it really tough to earn some decent money in share market?  But the question is not very difficult to answer.

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What most retail investors want to do is make a fortune within a short span in the markets. If that was possible then everyone would have been an investor.

What we need to understand is that markets can be very rewarding for some and sometimes.

For a common investor they can definitely provide a return which is worth putting money in the market.

Let's define what we have just discussed.

Broadly, there are two ways of putting money in equity - directly in stocks and mutual funds. Stocks can be further divided into cash market and derivatives.

As it has been proved in countless studies and accepted worldwide, derivative market is the most risky, followed by cash market and finally mutual funds.

Since investing in mutual funds is passive investing i.e. the investor does not require taking investment actions himself but rather entrusts his money with a fund manager who manages the investments according to the guidelines of the fund, we shall focus more on cash and derivative markets in this article.

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One important fact that is the entry pass-code to make money in the stock markets is - You need to work for it! It might sound a very repetitive phrase read in almost every investor guide, but is mostly overlooked.

Importance of this tenet can't be negated. There is no free meal in the world, so why should the market reward you for not putting any efforts at all. But I think more than the efforts, it is fear and laziness in putting efforts that stops one.

I mean what does it take to have a look at a few numbers and some documents before buying a stock. Not even 30 minutes but we rarely do it!

The reasons we come up with could be - "I am not fit to do it", "who has the time", "since my broker does it, why should I bother", etc.

The funny part is that organizing a wedding or a trip for that matter takes much more effort and intelligence than investing, but the simplest things in life are the most ignored ones.

It can actually be child's play to invest, if one allocates some time for it. We will explore it going forward, but be ready with a pen and paper and a mind receptive to understand how to make money.

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Equities work in the most mysterious ways and are much more difficult to digest in hindsight.

The first part indicates the fact that we often may not see a stock being robust, in terms of numbers, like Tata Communications going up when the markets are making new yearly highs.

Or we may see stocks like Jaiprakash Associates doing a see-saw play. But such situations are not many. Markets do justice to credible scrips in the long run.

The second part highlights how disgusted we feel when we had particular scrip in our watch-list but didn't invest and the same is making wonderful gains.

"I just missed it, you know" is the line of this just-missed investor. In fact, such instances may make the investor even more dangerous if he becomes overconfident about his hunches.

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If one is not a person who can extensively devote hours to stocks, he should try to stick to the blue chips.

These are companies that have been in existence for a long time, have posted positive numbers every time, mutual funds hold investments in them and are market leaders.

These stocks may seem to be a bit expensive for the reasons we indentified above, but they make a safe bet. It is important to have patience in the markets.

If your stock is running in red but you find that nothing important in the company has changed, stick to it.

Usually, anything important, like top management, mergers and acquisitions, dividends, splits, financial results, etc. are reported to the stock exchanges and one can find such news on financial portals.

Investing in small caps on stories like "small caps are the next thing", "it is a value stock", "the SME segment is going to be the most favored in 2010", and so on, is nothing but playing dart with your eyes covered.

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Derivatives, futures and options are another way to make money. People do trading in derivatives for hedging and speculation.

If you think that derivatives are something that tosses your mind every time you try to understand them, then stay away from them.

No point putting your money in a game when you can't even play it. In case you are fine with what these instruments are, how to trade, how much investment is required and what the risks are, then you can use them as an effective tool for portfolio management.

As an investor, you should always gauge your maximum downside. Derivatives become worrisome when we see markets going one way - up or down.

Usually retail investors buy/sell Nifty or Sensex lots and sell/buy them after a descent gain.

But what if the markets are going up/down and not providing an opportunity to reverse your position. Being in the market, one should not be hesitant to accept losses but the maximum loss can be limited with some due consideration.

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For professional investors, fundamentals and market variables have an important bearing as they have to justify their positions to their investment committees or boards.

For people like us, it is the hunch that works most of the time as we don't have access to latest news, insider numbers and knowledge of institutional investors.

But this is no reason to feel down that we can't be a profit-making investor. In fact, what Peter Lynch, one of the best fund managers who out-performed the market for 13 years by an average return of 13.4 per cent, says is that the most important qualities for one to be successful in market are "patience, self-reliance, common sense, tolerance for pain, open-mindedness, detachment, persistence, humility, flexibility, willingness to do independent research, willingness to admit mistakes, ability to ignore general public".

To earn a decent return might not be a very difficult task if we can do a bit of common sense investing.



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