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What are Markets?

A stock market is a market for the trading of company stock/ shares, and derivatives. This includes securities listed on a stock exchange as well as those only traded privately. Market is a place where buyers and sellers of securities can enter into transactions to purchase and sell shares, bonds, debentures etc.

It also enables corporates, entrepreneurs to raise resources for their companies and business ventures through public issues. As a result, idle resources (of investors) are transferred to those who need them (corporates). Markets, thus, provide channels for reallocation of savings to investments and entrepreneurship.

Primary markets :

The primary market is that part of the capital markets that deals with the issuance of new securities. Companies, governments or public sector institutions can obtain funding through the sale of a new stock or bond issue. This is typically done through a syndicate of securities dealers. The process of selling new issues to investors is called underwriting. In the case of a new stock issue, this sale is an initial public offering (IPO)

  Introduction to Primary Markets

Most listed companies are usually started privately by their promoter(s). However, the promoters’ capital and the borrowings from banks and financial institutions may not be sufficient for setting up or running the business over a long term. So, companies invite the public to contribute towards the equity and issue shares to individual investors. The way to invite the public to subscribe to the share capital of the company is through a ‘Public Issue’. Once this is done, the company allots shares to the applicants as per the prescribed guidelines laid down by SEBI

The Primary Market is, hence, the market that provides a channel for the sale of new securities to issuers, which may can be the Government or corporates, to raise resources to meet their fund raising requirements. The securities may be issued at face value, or at a discount/premium and may take a variety of forms such as equity, debt etc. They may be issued in the domestic and/or international market

Issue at Face Value :

The nominal value of the share, assigned to it by the issuer, is called the Face Value or Par Value. It is the original cost shown on the share certificate and the extent to which the shareholder is liable to the company. In case of equity shares, the value is generally quite small; for instance Rs 1, Rs 2, Rs 5, Rs 10 etc. Hence, if shares are offered at this value then it is said they are being offered at Face Value or at Par

Issue at a premium or at a discount :

When shares are offered at more than the Face Value, then it is said that the issue is at a premium. The premium is the amount charged over the Face Value. Conversely, if shares are offered at a price lower than Face Value, then the issue is at a discount. The difference between the Face Value and the Offer Price is the discount

  What Are The Types of Issues?

Primary market Issues can be classified into four types.

  1. Initial Public Offer
  2. Follow on Offer
  3. Rights Issue
  4. Preferential Issue

  Initial Public Offer (IPO):

When an unlisted company makes either a fresh issue of securities or an offer for sale of its existing securities or both, for the first time to the public, the issue is called as an Initial Public Offer.

  Follow On Public Offer (FPO):

When an already listed company makes either a fresh issue of securities to the public or an offer for sale of existing shares to the public, through an offer document, it is referred to as Follow on Offer (FPO).

  Rights Issue:

When a listed company proposes to issue fresh securities to its existing shareholders, as on a record date, it is called as a rights issue. The rights are normally offered in a particular ratio to the number of securities held prior to the issue. This route is best suited for companies who would like to raise capital without diluting stake of its existing shareholders.

  A Preferential issue:

A Preferential Issue is an issue of shares or of convertible securities by listed companies to a select group of persons under Section 81 of the Companies Act, 1956, that is neither a rights issue nor a public issue. This is a faster way for a company to raise equity capital. The issuer company has to comply with the Companies Act and the requirements contained in the chapter, pertaining to preferential allotment in SEBI guidelines, which inter-alia include pricing, disclosures in notice etc

  Who Are The Various Intermediaries In A Public Issue?

AThe Issuing Company has to appoint various intermediaries for the issue process. The various intermediaries involved are:

  • Book Running Lead Managers (BRLMs)
  • Bankers to the Issue
  • Underwriters
  • Registrars to the Issue etc.

  What Is The Role Of The Intermediaries?

Book Running Lead Managers:

The Company issuing shares appoints the BRLM or the Lead Merchant Bankers. The role of the BRLM can be divided into two parts, viz., Pre Issue and Post Issue. The Pre Issue role includes compliance with the stipulated requirements of the SEBI and other regulatory authorities, completion of formalities for listing on the Stock Exchanges, appointing of various agencies such as advertising agencies, printers, underwriters, registrars, bankers etc.

Post Issue activities include management of escrow accounts, deciding the final issue price, final allotment, ensuring proper dispatch of refunds, allotment letters and ensuring that each agency is carrying out their part properly

  Bankers to the Issue:

Bankers to the issue, as the name suggests, carry out all the activities of ensuring that the funds are collected and transferred to the Escrow accounts.

  Registrars to the Issue:

The Registrar finalizes the list of eligible allottees after deleting invalid applications and ensures that the corporate action for crediting shares to the demat accounts of the applicants is done and the refund orders, where applicable, are sent.

  Underwriters to the Issue:

An investment banking firm enters into a contract with the issuer to distribute securities to the investing public. They get an Underwriting Commission for their services. In case of under subscription, they have the obligation to subscribe to the left over portion.

Benefits & Drawbacks of Investing in the Primary Market:

Investing in the primary market has its own benefit and drawbacks. Some of the key benefits are:

  • It is safer to invest in the primary markets than in the secondary markets as the scope for manipulation of      price is smaller.
  • The investor does not have to pay any kind of brokerage or transaction fees or any tax such as service      tax, stamp duty and STT.
  • No need to time the market as all investors will get the shares at the same price

Some of the major drawbacks are as following:

  • In case of over subscription, the shares are allotted in proportionate basis. Thus, small investors hardly      get any allotment in such a case.
  • Money is locked for a long time and the shares are allotted after a few days where as in case of purchase      from the secondary market the shares are credited within three working days

  Classification of Issue

Procedure of arriving at the issue price:

  • Fixed Price
  • Book Building

  Fixed Price:

Any IPO can be priced by two methods. Firstly, where the issuing company, in consultation with the BRLM, arrives at a fixed price at which it offers the shares to the public. In the second method, the company and the BRLM fix a floor and cap price for the issue. This range is called the price band. Investors are free to bid at any price in this range. The final price is determined by market forces according to the demand for the issuing company’s shares. This is called the Book Building Process.

  Book Building:

In case of a book building IPO, the offer must be open for at least three days. The BRLM declares the issue price before the allotment, which must be completed within 15 days from the closure of the IPO. The shares should get credited to the respective bidders’ de-mat account within two working days from the date of allotment. The refund orders are also dispatched within this time.

  Category of investors who can invest in an IPO:

As far as the IPO is concerned, there are three categories of investors.

  • Qualified Institutional Bidders.
  • Non-Institutional Investors.
  • Retail Investors

  Qualified Institutional Investors:

Under this head, financial institutions such as Banks, Mutual funds, Insurance companies, Foreign Institutional investors etc. are permitted to bid for the shares. A mMaximum of 50% of the issue can be kept reserved for investors falling under the QIB category. Out of the 50% shares, 5% are reserved for Mutual Funds.

  Non-Institutional Investors:

Under this category, resident Indian individuals, HUFsS, companies, corporate bodies, NRIs, societies and trusts whose application size in terms of value is more than Rs 1 lakh are allowed to bid. At least 15% of the total issue has to be reserved for Non-Institutional Bidders.

  Retail Investors:

Under this category, only Individuals, both Resident and NRIs along with HUFs are allowed to bid. At least 35% of the issue has to be reserved for such investors. The size in terms of value should not exceed Rs 1 lakh if one wants to apply under this category

  How are share prices determined?

The share prices, the prices at which the shares trade are determined by supply and demand. If there are more buyers than sellers, then the price will rise and if there are more sellers than buyers it will fall. In turn that supply and demand is determined by a number of other factors including:

General market sentiment

  • Movements on international markets
  • Economic events and Government decisions
  • Company news and performances
  • Interest rates
  • Speculation and rumour

Secondry markets :

The secondary market is the financial market for trading of securities that have already been issued in an initial private or public offering. In the secondary market, securities are sold by and transferred from one investor or speculator to another. The secondary market is where you can purchase securities from the seller as opposed to the issuer of such a security. Hence securities that are initially issued in the primary market by companies are traded on the secondary market. The secondary market comprises of two broad segments viz. Equity and Debt. Equity shares are the most widely traded form of securities. There are various ways in which equity shares are issued such as IPOs, rights issues and bonuses

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What are shares?

A share is one of a finite number of equal portions in the capital of a company, entitling the owner to a proportion of distributed, non-reinvested profits known as dividends and to a portion of the value of the company in case of liquidation. Equity is a share in the ownership of a company. It represents a claim on the company’s assets and earnings. As you acquire more stock, your ownership stake in the company increases. The terms share, equity and stock mean the same thing and can be used interchangeably.

  Types of shares

Shares can be voting or non-voting, meaning they either do or do not carry the right to vote on the board of directors and corporate policy. Whether this right exists often affects the value of the share. Voting and Non-Voting shares are also known as Class A and B shares.

The most common form of shares is ordinary (equity) shares. One can also buy preference shares, options and partly paid shares.

There are a number of different types of shares such as ordinary or preference shares which have different properties.

Preference shares are those shares in a company with rights in various ways superior to those of ordinary shares; for example, priority to a fixed dividend and priority over ordinary shares in the event of the company being wound up

When a share is issued, the person applying for it must pay to the company, in cash or equivalent value, the amount of its nominal value together with any premium required by the company. Shares are fully paid when the whole amount has been received by the company.

Shares may also be issued on the basis that only part of their price is to be paid initially, with the remainder being required when called for by the company.

For more experienced investors, derivatives such as options and warrants provide further diversification. However, when the majority of investors invest in shares, they buy ordinary shares.

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What is a stock exchange?

A stock exchange, share market or bourse is a corporation or mutual organization which provides facilities for stock brokers and traders, to trade company stocks and other securities. Stock exchanges also provide facilities for the issue and redemption of securities as well as other financial instruments and capital events including the payment of income and dividends. The securities traded on a stock exchange include: shares issued by companies, unit trusts and other pooled investment products and bonds. To be able to trade a security on a certain stock exchange, it has to be listed there.

The Bombay Stock Exchange Limited, or BSE has a nation-wide reach with a presence in 417 cities and towns of India. Its index, or market indicator is known as the Sensex. It gives a general idea regarding the movement of the stocks; whether they have gone up or have gone down. If the Sensex goes up, it means that the prices of the stocks of most of the major companies on the BSE have gone up.

The S&P CNX Nifty, or simply Nifty, is the leading index for large companies on the National Stock Exchange of India. It consists of 50 companies representing 24 sectors of the economy, and representing approximately 47% of the traded value of all stocks on the National Stock Exchange of India

  Who is a broker?

A stockbroker is person who is licensed to trade in shares. Brokers also have direct access to the sharemarket and can act as your agent in share transactions. For this service they charge a fee. They can also offer additional services like advice on shares, debentures, government bonds and listed property trusts and non-listed investment options (cash management trusts, property and equity trusts.

In addition a stock broker can plan, implement and monitor your investment portfolio, conduct research and help you optimize your returns

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What is a Demat A/c?

Investors who wish to trade in the market need to have a dematerialized, or demat, account. In India, the government has mandated two entities –National Securities Depository, or NSDL, and Central Depository Services (India), or CDSL – to be the custodian of dematerialized securities.

Q. What do you mean by dematerialization?

Dematerialization is the process by which physical certificates of an investor are converted to an equivalent number of securities in electronic form and credited in the investor's account with its DP.

Q. What is a depository?

A depository can be compared to a bank. A depository holds securities like shares, debentures, bonds, government securities, and units, among others of investors in electronic form. A depository also provides services related to transactions in securities.

Q. How can I avail the services of a depository?

A depository interfaces with the investors through its agents called depository participants, or DPs. If an investor wants to avail of services offered by the depository, the investor has to open an account with a DP. This is similar to opening an account with any branch of a bank in order to utilize the bank's services.

Q. What are the benefits of opening a demat account?

The benefits of opening a demat account are:

  1. Immediate transfer of securities;
  2. No stamp duty on transfer of securities;
  3. Elimination of risks associated with physical certificates such as bad delivery, fake securities, etc.;
  4. Reduction in paperwork involved in transfer of securities;
  5. Reduction in transaction cost;
  6. Nomination facility;
  7. Change in address recorded with DP gets registered electronically with all companies in which investor       holds securities eliminating the need to correspond with each of them separately;
  8. Transmission of securities is done by DP eliminating correspondence with companies;
  9. Convenient method of consolidation of folios/accounts;
  10. Holding investments in equity, debt instruments and government securities in a single account;
  11. Automatic credit of shares into demat account, arising out of split/consolidation/merger etc.

Q. How do I select a DP?

  1. You can select your DP to open a demat account just like you select a bank for opening a savings       account. Some of the important factors for selection of a DP can be:
  2. Convenience - Proximity to the office/residence, business hours.
  3. Comfort - Reputation of the DP, past association with the organization, whether the DP is in a position to       give the specific service you may need?
  4. Cost - The service charges levied by DP and the service standards

Q. What are the documents that I will require?

• Proof of identity (copy of any one proof):

    A. Passport
    B. Voter ID Card
    C. Driving license
    D. PAN card with photograph
    E. Identity card/document with applicant's photo, issued by

        a. Central/State government and its departments,
        b. Statutory/Regulatory Authorities,
        c. Public sector undertakings,
        d. Scheduled commercial banks,
        e. Public financial institutions,
        f. Colleges affiliated to universities (this is valid only till the time the applicant is a student),
        g. Professional bodies such as ICAI, ICWAI, ICSI, Bar Council etc, to their members; and
        h. Credit cards/debit cards issued by banks

• Proof of address (copy of any one proof):

    1. Ration card
    2. Passport
    3. Voter ID card
    4. Driving license
    5. Bank passbook
    6. Verified copies of electricity bills/ residence telephone bills (not more than two months old)/ Leave and         license agreement/ agreement for sale.
    7. Self-declaration by High Court and Supreme Court judges,
    8. Giving the new address in respect of their own accounts.
    9. Identity card/document with address, issued by

        a. Central/State government and its departments,
        b. Statutory/Regulatory Authorities,
        c. Public sector undertakings,
        d. Scheduled commercial banks,
        e. Public financial institutions,
        f. Colleges affiliated to universities (this is valid only till the time the applicant is a student),
        g. Professional bodies such as ICAI, ICWAI, ICSI, Bar Council etc, to their members; and

• Passport-size photograph

• Copy of PAN card

One must remember to take original documents to the DP for verification. Your DP will carry-out "in-person verification" of account holder(s) at the time of opening your account.

Q.How long does the dematerialization process take?

Dematerialization will normally take about 30 days.

Q. Can I dematerialize my debt instruments, mutual fund units, and government securities also      in my demat account?

You can dematerialize and hold all such investments in a single demat account.

Q. Can my electronic holdings be converted back into certificates?

If you wish to get back your securities in physical form, all you have to do is to request your DP for rematerialisation of the same. 'Rematerialization' is the term used for converting electronic holdings back into certificates. Your DP will forward your request to the depository. After verifying whether you have the necessary balance, the depository will intimate the registrar, who will print the certificates and dispatch the same to you.

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Buying and selling of dematerialised securities

Q. What is the procedure for selling dematerialized securities?

The procedure for selling dematerialized securities is very simple. After you have sold the securities, you would instruct your DP to debit your account with the number of securities sold by you and credit your broker's clearing account. This delivery instruction has to be given to your DP using the delivery instruction slips given to you by your DP at the time of opening the account. Procedure for selling securities is given here below:

    1. You sell securities in any of the stock exchanges through a broker;
    2. You give instruction to your DP to debit your account and credit the broker's (clearing member) account         before the deadline time specified by your DP;
    3. Before the pay-in day, your broker gives instruction to its DP for delivery to clearing corporation;
    4. Your broker receives payment from the stock exchange (clearing corporation);
    5. You receive payment from the broker for the sale of securities.

Q. How can I purchase dematerialized securities?

For receiving demat securities you may give a one-time standing instruction to your DP. This standing instruction can be given at the time of account opening or later. Alternatively, you may choose to give separate receipt instruction every time some securities are to be received. The transactions relating to purchase of securities are summarized below:

    • You purchase securities through a broker;
    • You make payment to your broker who arranges payment to clearing corporation on the pay-in day;
    • Your broker receives credit of securities in its clearing account (clearing member account) on the pay-out        day
    • Your broker gives instructions to its DP to debit its clearing member account and credit your account;
    • You receive shares into your account. However, if standing instructions are not given at the time of        opening the account, you will have to give 'Receipt Instructions' to your DP for receiving credit.

You should ensure that your broker transfers the securities from its clearing member account to your depository account, before the book closure. If the securities remain in the clearing account of the broker, the company will give corporate benefits (dividend or bonus) to the broker. In that case, you will have to collect the benefits from your broker.

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How to receive income from shares?

The income received from shares is called a dividend.

We invest in shares to make money – either through a share’s capital growth, i.e. the amount by which the share price increases in value over time, or through the dividends it pays to its shareholders. Dividends are payments made by companies to shareholders from their profits. Not all companies pay dividends. Dividends are usually paid twice a year and are in effect the yield from your investment. Some growth companies plough most of their profits back into generating more business rather than paying out dividends to investors

Q. How would I get my dividend/interest or other cash entitlements?

The concerned company obtains the details of beneficiary holders and their holdings from the depository. The payment to the investors will be made by the company through the ECS, or Electronic Clearing Service, facility or by issuing warrants on which your bank account details are printed. The bank account details will be those, which you would have mentioned in your account opening, form or changed thereafter.

Q. How would I get my bonus shares or other non-cash entitlements?

The concerned company obtains the details of beneficiary holders and their holdings from NSDL. Your entitlement will be credited by the company directly in your depository account.

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How to make investment decisions?

The stock market has, perhaps, the most exciting investment opportunities for the investor community. At the same time, it could be unnerving and scary. In fact, equity investment has always remained a big challenge, not only for retail but institutional investors, too. Moreover, investors’ discomfort generally increases with a rise in market volatility. You will find many investors entering the market at high levels and making a quick exit as the market witnesses a correction. Unfortunately, such investors seldom think of investing in stocks again. Thus, they ignore an excellent opportunity to earn above average returns.

In short, investing in equities can be a difficult proposition for retail investors. However, equity must form a part of every investor’s portfolio. The proportion could vary, depending on the investor’s age, monetary requirements, risk appetite, etc.

To cope with volatility, it is important to have a disciplined and systematic approach to equity investment. Set your own rules and more importantly, follow them religiously. Indeed, the mantra for successful equity investment is a well thought-out, disciplined investment strategy.

A long-term monetary commitment, adherence to discipline in investment and decisions based on company fundamentals are essential ingredients for successful equity investment.

The Golden Rules For Investing In Equities

    The First Major Axiom: ON RISK
    Worry is not a sickness but a sign of health. If you are not worried, you are not risking enough.

    The Second Major Axiom: ON GREED
    Always take your profit too soon.

    The Third Major Axiom: ON HOPE
    When the ship starts to sink, don't pray. Jump.

    The Fourth Major Axiom: ON FORECASTS
    Human behaviour cannot be predicted. Distrust anyone who claims to know the future, however dimly.

    The Fifth Major Axiom: ON PATTERNS
    Chaos is not dangerous until it begins to look orderly.

    The Sixth Major Axiom: ON MOBILITY
    Avoid putting down roots. They impede motion.

    The Seventh Major Axiom: ON INTUITION
    A hunch can be trusted if it can be explained.

    The Eighth Major Axiom: ON RELIGION AND THE OCCULT
    It is unlikely that God's plan for the universe includes making you rich.

    The Ninth Major Axiom: ON OPTIMISM AND PESSIMISM
    Optimism means expecting the best, but confidence means knowing how you will handle the worst. Never     make a move if you are merely optimistic.

    The Tenth Major Axiom: ON CONSENSUS
    Disregard the majority opinion. It is probably wrong.

    The Eleventh Major Axiom: ON STUBBORNNESS
    If it doesn't pay off the first time, forget it.

    The Twelfth Major Axiom: ON PLANNING
    Long-range plans engender the dangerous belief that the future is under control. It is important never to     take your own long-range plans, or other people's, seriously.

You will find many investors entering the market at high levels and making a quick exit as the market witnesses a correction. Unfortunately, such investors seldom think of investing in stocks again. Thus, they ignore an excellent opportunity to earn above average returns.

In short, investing in equities can be a difficult proposition for retail investors. However, equity must form a part of every investor’s portfolio. The proportion could vary, depending on the investor’s age, monetary requirements, risk appetite, etc.

To cope with volatility, it is important to have a disciplined and systematic approach to equity investment. Set your own rules and more importantly, follow them religiously. Indeed, the mantra for successful equity investment is a well thought-out, disciplined investment strategy.

A long term monetary commitment, adherence to discipline in investment and decisions based on company fundamentals are essential ingredients for successful equity investment.

Here are golden rules for safe equity investment, which could help you to sail through different market scenarios:

  Be a long term investor

This is the first and most important rule of equity investment. Timing the market - entering the market at low levels and exiting at higher levels - is almost impossible. Though often heard on the street, this strategy is difficult to implement, as it is nearly impossible to gauge when the market has peaked and when it has bottomed out. Do not play the guessing game; it is more sensible to put money into the market with a long term commitment

Trading or speculating seldom helps in equities. You could make quick bucks by trading in 10 deals, but you could lose whatever you have earned in just one deal. This is the risk you take when you try to trade and make easy money from the stock market. Apart from incurring financial losses, it also involves a lot of mental stress. Trading could give you sleepless nights.

Globally, economies follow seven year business cycles of boom and bust. Thus, when you are investing, invest for a fairly long term, say three to seven years. Indeed, it is a proven fact that over the long haul, equities tend to outperform all other asset classes.

  Invest time and efforts in doing your homework

Investing in equities is not a one time affair. You need to invest a lot of time and efforts, apart from money, to understand industries, economic trends and so on. Further, you should dedicate time to analyse companies, as this will help you to avoid costly mistakes. You need to develop the habit of reading first hand information - such as company annual reports, company announcements and so on. Annual reports of large companies are easily available on the web. Reading business dailies is also a must for equity investors.

Get your basic concepts and fundamentals right. Revisiting financial fundamentals periodically would be a good idea. You need to understand basic concepts like the Price-Earning ratio (P/E ratio), operating margins, earnings per share, etc. Analysing balance sheets and profit and loss accounts is a must. A short term course on ratio analysis would be of immense help

Further, understand technicalities of investment, like how the stock market operates, how to buy or sell, settlement procedures, etc.

Also focus on domestic economic and policy development. These factors are also of immense importance as they lead to structural changes in the economy that would benefit certain industries. For instance, the boom in the telecom sector in the domestic market is driven by government policy initiatives over the years.

Lastly, you also need to keep yourself abreast with key global developments. With liberalisation and subsequent integration of economies, global factors also impact domestic industries and the stock market

The stock market is said to be all about sentiments. However, in this mad rush you need to stay focused and maintain a lot of discipline in executing your investment strategy. Thus, irrespective of which way the market moves, you need to stick to your investment strategy without getting swayed by market sentiments.

In short, discipline in your investment approach will protect you from the herd mentality. Most investors are tempted to buy when everyone is on a buying binge and sell when the market is moving southwards. But if you have decided as a rule to buy a particular stock only when the overall market corrects by one per cent, this rule could kill your temptation to jump on the stock when the market is overheated

  Pay the right price

It is essential to buy at the ‘right price’, that is, the price that you are comfortable paying. Do not buy because others are doing so. This will help you to hold the stock for a longer duration.

Conversely, when you have to decide when to sell, if you feel that the market is overheated and prices have reached unrealistic levels, exit; Don’t stick on hoping for a little more. It helps to limit your own greed

  Portfolio diversification

Diversion is a very old and popular investment strategy, applied to reduce portfolio risk. Actually, before you start investing in equities, you should consider various factors like your age, monetary requirements, etc, to determine how much risk you can take on. For instance, if you are around 30 years old, you can invest a greater portion of your portfolio in equities than a retired person. Once you have determined how much risk you can take on and how much you can invest regularly in equities, try to achieve diversification in your portfolio.

To reduce risk, diversify within equities by investing across sectors. Do not invest in one or two sectors or any negative development pertaining to those sectors could severely impact the profitability of your portfolio.

Secondly, ensure a good blend of small, mid and large-cap stocks in your portfolio. While large cap stocks would lend stability to your portfolio, small and mid cap stocks would give you an above average appreciation. Basically, growth potentials are higher in the case of small and mid cap stocks. Thus, just having large cap stocks could be safe but also mean that returns are just about at the same level as market returns.

Thirdly, invest across value and growth stocks. Growth stocks are risky but also offer higher returns while value stocks are likely to be less volatile

In brief, when you spread your investments over a larger number of stocks and sectors, if a few stocks/sectors under-perform, this is compensated by other stocks/sectors which perform well.

  Do not buy on tips or rumors rather focus on fundamentals

Tips and rumors are an integral part of the stock market. Always remember that these could be engineered by a group of traders or punters. Therefore, a sharp rally based on rumors could fizzle out in a short time.

You should strictly stay away from rumors, suggestions or tips received from your broker or friends or the investor circle. Investments based on tips could lead to huge losses. Rather, you would be better off investing based on industry and company fundamentals. Furthermore, generally such tips pertain to small and mid cap stocks, where liquidity is extremely limited. If you invest in such stocks, you could get trapped in an illiquid investment for a very long time.

  Buy shares of companies whose business you understand

In the long run, the stock market rewards companies with strong fundamentals and good financial performance. Therefore, it is essential for you to invest in companies whose industry dynamics and business models you

understand. This will help you to gauge whether a transformation in an industry is positive or negative, at an early stage itself, and its likely impact on the company’s fundamentals. Your understanding of industry dynamics would help you to evaluate industry trends.

  Don’t sell in panic

Markets go through cycles of boom and bust and volatility is a way of life in equities. Do not sell your holdings in a hurry and panic just because your stocks have witnessed a sudden correction. Always focus on company fundamentals; if they are intact, there’s nothing to worry about

  Do not borrow money to invest in equities

It is true that equities tend to outperform other investment avenues in the long run. However, there is no guarantee that you will make money on your stocks either in terms of dividends or capital gains, if your sale of shares is time-bound. Therefore, if you borrow funds to invest in equities, it might be difficult for you to repay the interest or principal on the loan, on time.

What really matters in equity investment is your withholding power. So, invest your surplus money in equities and only invest an amount that you will not need in the immediate future. If you borrow and invest, your withholding power to stay invested for the long term could be limited.

  Do not marry a stock

If you feel your investment decision has gone wrong, exit the counter; don’t try to average. It is prudent to cut losses, rather than lower the average purchase price. Particularly in cases where the stock is witnessing a continuous sell-off, it is better to offload your position and book losses. You can use the same money to invest in other opportunities.

  Invest regularly and gradually build up your position

Just as you put money into fixed interest bearing investments regularly, also invest in equities on a periodic basis. Further, do not invest at one go. Rather, buy on a regular basis and in small lots. This will help you to buy stocks at a reasonable price.

  Monitor your portfolio

Investing in equity is not a one time affair. Buying shares is perhaps the smallest part of the overall investment activity. It is important to periodically monitor and review your investment portfolio. It is always prudent to sell a stock if you feel that the fundamentals have deteriorated and the stock is overpriced in comparison to its fair value. Money has an opportunity cost and by selling an overvalued stock you can investment the same money elsewhere, for better capital appreciation opportunities

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