Nov 02 2007
Dumb’s guide to investing in Sensex.
With sensex rising (& falling) it provides both an opportunity and challenge for the retail investor .One don’t want to miss the party by not investing in quality stocks and also don’t end up buying stocks which have stretched there valuation, so here I am with my own guide on investing .
Rise of Sensex provide opportunity for retail investor to be part of “India Story” as everyone calls it. Here are will put some strategy which I normally follow , note that I am no expert at investing and had no formal training on same. Whatever put here are musings then an expert advice so take it with pinch of salt . Having set the ground rules let’s go for the meat
Rule 1 Don’t treat market as Russian roulette , investing is buying stake in a company so don’t buy by gut , tips , suggestion . It is a more of a factor of your due diligence then luck. Dont try to beat the probability invest wisely.
Rule 2 Know your financial limits make a note of how much u can invest , for how long you can invest and what is the (realistic) target you are looking , remember that stocks normally return good returns in 1.5 yrs - 3 yrs so patience is needed and you need to lock money.
Rule 3 Identify a company and do lot of research , search on news.google.com , moneycontrol , ndtvprofit and any other site which you are comfortable with , see what the company is doing what there future plans are , how is there core business doing , is there any good or bad vibes going about the company.
Rule 4 Understand P/E , here is a brief definition (source Wikipedia) :
The P/E ratio (price-to-earnings ratio) of a stock (also called its “earnings multiple”, or simply “multiple”, “P/E”, or “PE”) is a measure of the price paid for a share relative to the income or profit earned by the firm per share. A higher P/E ratio means that investors are paying more for each unit of income. It is a valuation ratio included in other financial ratios.
It is very important ratio and is available for each stock on most of the sites , good company with good management has ratio around 15-20 so look for companies in that range anything above represent a high growth company or a mere speculation trading below that means company is either overlooked by the market (chance very low) or company not doing.
Rule 5 Check dividend history good company normally give dividends at regular interval , there profitability . management & board profile who there client is , what product they make and would you be interested in doing business with that company so if it is a mobile company would you be interested in taking there mobile services.
I know it is difficult to track stocks with so many parameters but to apply these rules better to create a set of around 10 -15 companies depending on the time in hand and money to invest . Set can be chosen based on a sector like infrastructure , IT , banking or can be chosen using indexes like BSE 30 (which I track) , BSE 100 or can be chosen using market caps be it midcap , smallcap or it can be chosen from the companies in news.
Gathering information and following certain pattern for investing requires some practice once you have that it becomes a habit and will be fun and fulfilling . There are no short cuts and hot tips such things might work but it will not give returns always . On parting note here is last rule When in confusion don’t buy and if you are still hell bent on buying in the state of confusion buy Reliance.
Happy Investing !!
