Decision making on Stock Investments

Stock Investments:

Investments and Saving – during a period of time, meant only as buying gold, getting assets like agricultural land and rental buildings. These were basically called as the investments. As like technology growth in the last 50 years, financial investment and savings have grown with different perspective. In current market, Investment have taken different forms like Mutual funds, Index funds, Systematic investment plan, Stocks and shares, Fixed deposit, Insurance investment, Pension policy, Bonds, Health and Life insurance (though it is insurance, it is kind of investment for life)

Though there are varies investment methods, each have it owns even and odds. Hence it is always very important to learn the methods to get into each of the investment. Let’s take one of the complicated and also risky investments - Stock investment.

Now here are the three steps to decide the stock investment method:

Step 1: Determine the Risk:
Investors are the one who is going to invest in the Stocks. First the investor must determine the risk he/she going to take in the market. There are three types of investors.

a. Low risk investors: They are conservative investors, those who are unwilling to take any risk with the money they invest. These investors are cautious and long term investors.
Investments are made in long term (3 – 5 years) in Blue Chips stocks. While there is a reasonable return, the shares are sold. This is called buy and hold strategy.

b. Medium risk investors: They are aggressive investors, those who willing to take calculated risks. These investors are aggressive investors.
Investments are made in medium term (1- 3 years) in growth stocks. While there is a high return, the shares are sold. This is called reasonably aggressive strategy.

c. High risk investors: They are speculative investors, those who willing to take any risk. These investors are speculator in search of quick money.
Investments are made in short term (1 – 6 months) in turnaround stocks. The shares are sold in quickly in search of quick money. This is called bold investment strategy.

Step 2: Determine the Time:
Analyze the time to do the investment in the stock market. There are always high and lows in the market. The high market is called as Boom and low market called as Slump. Ideally one should investment when the market is in Slump and sell when it is in Boom.

Boom market: During a boom phase, investors succumb to greed. Since the market is high, investors tend to make more profit and hence there is more buying.

As a good investor, since the prices are high in market, one should less at this time to gain more profit.

Slump market: During a slump phase, investors paralyzed to fear. Since the market is low, investors fearing to loss will start selling more.

Similar to Boom, during slump time the share prices are low. Hence one should buy shares at this time to gain big profit in the later stage.

The boom and slump in a market are not a fixed day, it is quite period of time. Also there is transition market stage from slump to boom and boom to slump. Investors should invest at the right time to make big profit.

Step 3: Select the company:
Selecting which company stocks to buy will play a very critical role in stock investment. Investors have to follow the company policy, quarter profit, determine profit, bonus offer, dividend offer, management reputation, government policy etc. These are some of the prime factors which influence the movement of the stock price of the company.

Obviously the share prices are driven by market investors. But the above factors are the one which drive these investors. Government policy play a major role, hence investor should have a good insight of company category.

So here are the three steps to decide which stock to buy, at what time to buy and when to sell.

Obviously the above three step will help us to invest in the stock market. But we should also have couple more things to remember to make sure we are successful in the stock investments.

Points to remember:
a. Disinvestment decision should be taken at the right time. If we have invested in a particular company stock, it doesn’t mean we are bonded to the company. The shares should be sold to profit. Investor should disinvest periodically.

b. Investor should never put all their money in one or two shares alone. This could cause more risk. Also if it is more diversified, following the each company shares will be difficult. Hence one should periodically shuffle the portfolio of shares periodically and also should have a manageable number of stocks.

c. Do not yield to the temptation of mindless speculation based on rumors, tips and hearsay. These could yield to a financial disaster.

Above steps and points will give a more insight on how to invest in the Stock market. The Stock market is dynamic, volatile and unpredictable. As an investor if you need to be successful, you need to devote sufficient time and follow the rule of the game.

As quoted by a famous Economist, “Owning shares is like being in business with a demented partner”. Every day, this partner offers you a price at which you can either sell your share of the firm, buy the partner out or do nothing. Most of the time, it make sense to ignore the partner. Every now and then, however, he offers a price so cheap that the firm is an irresistible buy, or so high that you should be happy to sell out. Hence remember the rule of card game: “ True luck consists not in holding the best cards at the table, luckiest is he who know when to rise and go home”