by
Ms. UMA SHASHIKANT, Centre for Investment Education and
Learning
Sitting
on a panel watching young students make presentations on equity
investing is an interesting experience.
They
display a lot of optimism about equity , a bewilderment at the
possible gains, also overwhelmed by the quantum of information they
had to process.
However,
what should a firsttime investor in equity , keen to learn the game,
know even before beginning to stake his hard-earned money hoping to
hit the jackpot?
`To
invest in equity is to invest in a business.'
This is an old adage, but there is merit in repeating it and,
perhaps, displaying it prominently in one's office.Investing in
equity is not about handing over your savings to someone and asking
for returns because you gave them your money.
Such
defined contracts are sold in the debt market, and you should seek
deposits, bonds and savings certificates if all that you want is
interest and return on your principal intact.
 |
| Ms. UMA SHASHIKANT, Centre for Investment Education and Learning |
Equity
is a different ball game.
Here,
you are funding business ideas.
Investing
in equity using tips, news or gossip are all different forms of
speculation. You are simply counting on getting lucky . Serious
equity investing requires developing the mindset of an investor in
businesses.
It
means you have made the choice that you will work and earn an income,
but that income will fund a few businesses that you cannot run
yourself.
The
first question one must ask is who has set up the business and how
they are running it. You need to know what the motive of the promoter
is.
In
the case of established businesses, there is enough history to
understand how it was built and managed.
New
businesses, on the other hand, hold out the promise of becoming big,
but their ability to pull this off will critically depend on the
promoters and managers.Spending time to learn how businesses are
created, built and managed provides an equity investor with an
invaluable perspective.
Equity
investing requires a good understanding of finance.The outcome of
business decisions is in the balance sheet of the company and a
serious equity investor should know how to read and comprehend this
document.
Every
business uses capital to build assets, generates revenue by using
these assets, and hopes to make a profit after paying all the
expenses incurred in the process. How well this cycle has been
working is evident in the financial statements of the business.
Without a sense of how assets are funded, revenue is earned and
profit is made, it is not possible to see how a business can achieve
sustainable growth over time.
Equity
investing also involves the crowd. To be able to buy a stock one has
selected without caring much for the views of the Street is not easy.
It is also likely to turn out to be an unwise decision.
Not
all activity in the market is speculation, but there is no way of
identifying the specific motive for prices to move the way they do.
Technical
analysts knowhow to deal with price and its signals. The others form
their own views and take action, but always run the risk of being
wrong. The collective wisdom of the market might turn out to be tough
to beat.
It
can get difficult when the loss on a stock chosen after careful
research keeps mounting. This is tougher than waiting for prices to
go up. Falling prices accumulate real losses.
Equity
investing can be more about the stomach than about the head, and
investors should be sure they have the right attitude. Successful
equity investors are not made overnight.
Young
investors who are enamoured by equity should pick up one stock, any
stock, and see if they are able to figure it out in detail. Now, that
would be the equity contest to hold, testing students for their
learnings, not necessarily their presentation skills.
About the author
The
writer Ms. UMA SHASHIKANT is managing director, Centre for Investment
Education and Learning
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