Planning to invest in the stocks?

Planning to invest in the stocks? Don't ignore these 8 market mantras

Smart investing is about setting alerts and monitoring the ecosystem around your investment.

It is not just enough to invest in a company’s stock but you must also be in a position to monitor your investments. Once you have invested in a company, keep a tab on earnings announcements, corporate actions, industry-specific news, company-specific news, new innovations in the industry, et al. Smart investing is about setting alerts and monitoring the ecosystem around your investment.

You will typically make profits in equity only in the long-term

This is something you must be very clear about at the outset. There are odd occasions when your investments will double in three months. These are exceptions, not the rule. Ideally, equity investment will yield attractive returns only over a 3-5 year period. Keep your patience levels high and take a long-term perspective.

Respect companies that pay taxes and dividends

What is so special about companies that pay dividends and taxes? Simple, it is an indication that the company generates enough cash to pay taxes and dividends. There are a lot of things that can be achieved with creative accounting, but when a company pays its taxes and dividends regularly, it is one of the best indications that a company is solvent and also liquid.

When it comes to investing, value matters more than price

Don’t give too much credence to prices. Some stocks might be trading in single-digits and others in five digits. Inferring that just because a stock is trading in single-digits there is perceived value might be illusionary. There are obvious inherent reasons why stocks are trading at such low value and valuations. Don’t be obsessed with low price-to-earnings (P/E) stocks. Probably that is what they are worth.

Don’t ignore the impact of taxes and transaction costs

Dividends and capital gains have tax implications. Dividends attract Dividend Distribution Tax (DDT) and also 10% tax above Rs 1 million per year. Short-term capital gains are taxed at 15 percent while the same for over a year is taxed at 10 percent without indexation above Rs 1 lakh. Taxes make a big difference to your effective return. Similarly, transaction costs like brokerage, turnover fees, Goods & Services Tax (GST), stamp duty and securities transaction tax (STT) also matter in the long run.

Prefer companies with low debt and equity base

This should be a guiding principle for your equity investing. Over the long-term, companies that create value are the ones with low debt and capital base. That explains why IT companies like Infosys and Tata Consultancy Services (TCS) created tremendous wealth. A low equity base means profits are going to be distributed across a less number of shares, which enhances valuations.

Learn to control your emotions

The secret to investing is to buy when others are fearful and sell when others are greedy. Never panic in markets because, that way, you will subsidise the other investor who do not panic. Never take investment decisions in a state of fear or optimism as you are more likely to be wrong. Always separate your emotion from your judgement when you are buying or selling equities.

Never borrow to invest in equities

That is the cardinal sin. As John Maynard Keynes said, “Markets can be irrational much longer than you can remain solvent.” You do not want the dual pressure of mark-to-market (MTM) losses on your equity holdings and regular commitments on your borrowings. Using a certain outflow commitment to finance an asset with uncertain cash flows and price movement is never a great idea.

There is merit in diversifying risk

Great investors like Warren Buffett, George Soros and Peter Lynch have spoken about the merits of concentrating your portfolio. But as a rational investor you need to avail the benefits of diversification. By spreading your risk across assets with low correlation, one stays protected during market cycles. That will ensure that your risk is in control.

These eight points are a good starting point for investors to kick-start their journey into equity markets. If one takes care of these small things in the market, the larger issues will take care of themselves.

 

Happy Investing

Source:Moneycontrol.com