The Fundamentals of Stocks

I must claim my place as a successful stock investor since I have made huge profits. How? By not investing a single penny, and investing with my instincts!

Well, this (technical) analysis stems from the fact that my elder brother (an Engineering grad and a post grad in Business Management) has invested a lot and has lost a lot. Since I didn't have any money to invest, naturally I profited with the absence of loss. This part of the story happened when the markets were down in the dumps.

Now cut to a later date when I had some money and I invested them into the first stocks that came to my mind without troubling anybody with any analysis. Luckily the stocks happened to be HDFC, Satyam and LICHFL. And the rest they say is history.

Hey, I'm not asking you to follow my style. You may not be that lucky after all.

Let's take a look at the fundamentals of stocks.

When you buy a share of a company you become a shareholder in that company. Shares are also known as Equities. Equities have the potential to increase in value over time. It also provides your portfolio with the growth necessary to reach your long term investment goals. Research studies have proved that the equities have outperformed most other forms of investments in the long term.

This may be illustrated with the help of following examples:

a) Over a 15 year period between 1990 to 2005, Nifty has given an annualised return of 17%.

b) Mr. Raj invests in Nifty on January 1, 2000 (index value 1592.90).The Nifty value as of end December 2005 was 2836.55. Holding this investment over this period Jan 2000 to Dec 2005 he gets a return of 78.07%. Investment in shares of ONGC Ltd for the same period gave a return of 465.86%, SBI 301.17% and Reliance 281.42%

Therefore, Equities are considered the most challenging and the rewarding, when compared to other investment options. Research studies have proved that investments in some shares with a longer tenure of investment have yielded far superior returns than any other investment.

What precautions must one take before investing in the stock markets ? Here are some useful pointers to bear in mind before you invest in the markets:

All investments carry risk of some kind. Investors should always know the risk that they are taking and invest in a manner that matches their risk tolerance.
Do not be misled by market rumours, luring advertisement or 'hot tips' of the day.
Take informed decisions by studying the fundamentals of the company. Find out the business the company is into, its future prospects, quality of management, past track record etc.
Sources of knowing about a company are through annual reports, economic magazines, databases available with vendors or your financial advisor.
If your financial advisor or broker advises you to invest in a company you have never heard of, be cautious. Spend some time checking out about the company before investing.
Do not be attracted by announcements of fantastic results/news reports, about a company. Do your own research before investing in any stock.
Do not be attracted to stocks based on what an internet website promotes, unless you have done adequate study of the company.
Investing in very low priced stocks or what are known as penny stocks does not guarantee high returns.
Be cautious about stocks which show a sudden spurt in price or trading activity.

Any advise or tip that claims that there are huge returns expected, especially for acting quickly, may be risky and may to lead to losing some, most, or all of your money.

Though direct stocks have the ability to give the best returns, it takes time and effort to be able to get the best out of it. The trouble is that we consider investment to be rocket science. Which, it is not. The irony is that even when the investing rules look so simple, it's hard to follow them.

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