Where to invest money for good returns? The most consistent answer of this question is equity. But just by investing in equity, one can earn good returns? No.
So what must be done?
How to invest money for good returns in equity? It will be not wrong to comment that equity investment is all about knowledge & patience.
Equity investing is easy, this is why so many people buy/sell stocks each day. But out of all traders, how many actually earns good returns consistently? A very tiny minority.
Why it is so? To generate good returns from equity investment, one needs to understand equity very well.
Good understanding of equity will come by knowing what factors affects stock price. Why stock price go up and why it falls.
Predicting stocks behavior becomes much easier if one can establish this relationship.
In short-term stocks behaves very unpredictably. It’s needless to spend time figuring out stock price movements in short term. In long term stock prices are more predictable.
What factors drive stock prices in long term? The fundamentals of business drives stock prices in long term.
In order to invest money for good returns, fundamental analysis must be done. If one can establish relationship between price and fundamentals of business, good returns can be ensured.
The correlation between business fundamentals and market price of stocks only becomes identifiable in long term. In short term, price movement is rather erratic.
So one this is clear, equity investing is not for short term gains. One must invest in equity with holding time of 3+ years.
But is it sufficient to buy any stocks and hold it for long term? This way good returns can be ensured?
(1) Avoid Playing Blind with Stocks
Stock prices are also influenced by external economic factors. Changes in Europe and America can effect Indian stock market.
In order invest money for good returns from equity, close monitoring of overseas & domestic economics is essential.
An informed investor can generate higher returns from equity in long term than a novice.
In addition to economics, sound knowledge stock evaluation is also essential.
People must develop a knack for reading and comprehending company’s financial statement.
Observing performance of individual sectors also helps while investing for good returns. Example: No matter how strong is the Automobile Manufacturing Company, but if auto sales are falling in country, income is bound to fall.
So being aware of individual sector-trends helps to time the market.
Many investors buy stocks without first analyzing these factors. Inculcating a habit of investing in stocks by being aware of interrelating factors is important..
(2) Buy Stocks for Long Term
People often treat stock investment as a tool for short term gains. For such people equity investment is simply buying low and selling high.
If target is to invest money for good returns, then stock must be bought and held for long term.
Stocks price may fluctuate erratically in short term. But in long term a clear TREND is visible.
In short term, returns from stocks is unpredictable. But in long term, good stocks can give good returns.
The best investment-horizon for stocks is 5-7 years or more. Buy best stocks now and leave it untouched for next decade.
People often panic when price of stocks falls. This results in short term selling.
But instead of panicking people must control nerves. Selling when prices are falling is the worst thing one can do in equity investment.
(3) Invest in Stocks that has strong fundamentals
We talk about good stocks, but what are good stocks? Good stocks are one which has strong fundamentals.
Investors shall avoid stocks with weak fundamentals under all conditions. Trick is to do the fundamental analysis of stocks before buying them.
Stock price will move up (in long term) if its underlying business has strong fundamentals. Stocks which has weaker fundamentals, price growth will not be as certain.
But why stocks with strong fundamentals are investor friendly? Fundamentals of business drives its stock price in long term.
A fundamentally strong business will result in its stock price appreciation in long term. Even if in short term stock price is volatile, but in long term, trend of fundamentally strong stock is always UP.
(4) Low Price does not mean Better Value
How many times people ask me to suggest good penny stocks. Whey people are fascinated with penny stocks?
People often get fascinated with companies whose stock price trades to very low levels.
Low price does not mean that stock is available at bargain price.
It is important to do value analysis of stocks before buying one. Value analysis is essential before buying a stocks.
It can happen that a stocks which is trading at $100/share is a better buy than a stock which is trading at only $1.
In order to come at such conclusion, one must know the intrinsic value of stocks. I have done value analysis for few top Indian stocks to give you a rough idea about what must be known before buying any stock.
In order to invest money for good returns, people must buy fundamentally strong stocks at undervalued price levels.
(5) Do not Put all Eggs in One Basket-Diversify
No matter how well one selects the stocks, but it is not advisable to put all eggs in one basket. Investing only in one company (or only in stocks) is not advisable.
If you are Warren Buffett you can take such a risk. But we know, we are not Buffett.
For common man, it is good to spread ones investment between equity, debt, real estate, gold, cash etc.
Even in equity, it is advisable to balance the portfolio. Buying different stocks which are not akin will be good.
One easy example can be pharmaceutical stocks and auto stocks. These two stocks represent completely non-related sectors.
One must limit the exposure to equity. If you are 30 years of age, do not invest more than 70% (100-Age) in equity. Spread the balance 30% in debt (bank deposits), real estate (REIT), gold (gold etf), cash (savings in bank).
Diversification averages out the total returns. But on positive side, it also minimizes the loss.
(6) Buying Stocks when Price Dips
This is one of the easiest way to generate good returns from equity.
People generally panic when their stock price falls below the purchased price. In panic, people sell their holdings. But this is not correct.
Instead of selling, one shall buy more stocks during price dips. Confused?
OK, lets go step by step!
* First step. It is important to buy only good stocks (fundamentally strong).
* Second step. Buy good stocks when they are undervalued.
* When price of fundamentally strong stocks fall (for some strange reason), instead of panicking and selling, one must buy more stocks.
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Disclaimer: All blog posts of getmoneyrich.com are for information only. No blog posts should be considered as an investment advice or as a recommendation. The user must self-analyze all securities before investing in one.