Be cautious while investing in shares

Pankaj Singh (26) was fascinated by an online advertisement which promised an income of Rs 5,000 per day by trading. He learnt that a broking house was offering a course on "Share Trading" through which he could learn how to earn by trading in stocks. He did a crash course which lasted a few weeks and then decided to try his luck. Since he was in between jobs, he had the time on his hands. Also, since the earning proposition was enticing, he thought this might help him earn a decent income instead of joining another nine to six job. After a few successes in trading for a couple of weeks, Singh started making losses and within six months he had blown up his savings of Rs 2 lakh which he had accumulated over three years.

Raghu Joshi (60) wanted to keep himself busy post-retirement and gradually started spending time in the office of a stockbroker where he learnt day trading. After losing a couple of lakhs Joshi swore never to invest again in shares.

Ketan Thakkar (43) started investing in stocks since his college days and suffered losses in the initial years. But he did not lose heart and started reading a lot on the process of fundamental analysis of stocks. Over the years his knowledge and analysis helped him create a good and lean portfolio of large-cap stocks and create wealth in the process. He primarily invests in the top 50 stocks (Nifty) as they are the most researched ones and a lot of data about those stocks is available.

Many investors will vouch for the fact that investing in stocks didn't help them create wealth, but on the contrary, they lost their principal or exited with losses. Their bitter experience taught them to stay away from direct stock investing or rather invest through mutual funds to reduce risk. Most don't have the risk appetite but want to invest in stocks because they heard someone else making money.

However, there are investors who have created enormous wealth by following a set of principles and discipline over a long period of time. But such investors are not many as most don't have the patience required for investing in equity.

Stock market investing is an art, rather than a game of chance or luck. It may take a couple of years for someone to really start understanding the process that fundamental analysis entails. Fundamental analysis focuses on sales, revenue, profitability, debt or loan servicing ability, free cash flows, working capital availability, etc. Based on this information a set of ratios are derived which gives an indication if the business is good and fairly valued for one to invest. Many investors also combine technical analysis which is observing price movement charts and certain patters which it creates to take decisions on buying or exiting at the right price. In short, investing in shares requires a lot of effort which is not possible for everyone. Secondly one needs to read constantly and stay abreast of any news related to the stocks they hold, a change in management /technology, government policies, adverse tax rules, etc, may affect the company's business and in turn, will affect the stock price. Remember that no matter how good you are at picking stocks, all stocks in the portfolio will not perform well at the same time. It's the overall portfolio you create that matters. Small investors who don't have time are better off investing through index funds or equity MF. High net worth individuals have the option of investing through PMS (portfolio management scheme) where the minimum investment amount is Rs 25 lakh but one needs to compare the past performance and charges to decide if it makes sense to invest through them.

The writer is founder, Proficient Financial planners