Know the Share Before You Put Money on It..

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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