Top 5 Stock Market Tips For Beginners

f:id:Niveza:20180424205341j:plain

The stock market has always lured investors with the promises of big money, however, generating a profit through equity investments is not easy. It requires huge amount of discipline, patience, in-depth understanding of the market, and a great deal of research among others.

Further to this is the stock market volatility always confuses the investors. They're in a constant dilemma whether to enter, hold or exit a certain stock.

Although there isn't a sure-shot formula that would guarantee success in stock markets, here we give you 5 golden rules. If you follow these stock tips prudently, the chances of your success will definitely increase:

  1. Maintain A Disciplined Investment Approach:

Historically, bouts of panic moments have been recorded even during great bull runs. Share Market volatility has inevitably led to numerous investors losing great deals of money even in the face of great bull runs.

Besides keeping a long-term broad picture in mind, it is advisable to have patience and follow a disciplined investment approach. Hence, if you invest your money systematically, and buy the right shares and hold on to your investments patiently they will generate outstanding returns.

  1. Invest Only In Businesses You Understand:

Always invest in a business instead of simply buying shares, and invest your money in a business that you understand.

  1. Don't Follow The Herd Mentality:

As Warren Buffett - the world's greatest investor said, "Be fearful when others are greedy, and be greedy when others are fearful!" Typically a buyer's decision is heavily influenced by the actions of her/his relatives, friends or neighbours. For eg, if everybody you know is investing in a certain stock market tip or a specific stock, chances are that you being a potential investor would do the same. It is very easy to be influenced by a friend who gives you a stock market tip and asks you to invest in it as it will give you good returns. However, this strategy generally backfires in the long run. So stick to your research and understanding.

  1. Never Take Uninformed Decisions:

Always ensure that you have done your due research before investing in stocks or stock tips. Amateur investors in general simply go by the company name or the industry that the company belongs to. This is a definite way of gambling with your money.

  1. Don't Try To Time The Stock Market:

Even Warren Buffett doesn't try to time the market, although he does recommend on having a strong view on the price levels appropriate to individual shares.

So, don't try to time the market. In fact, nobody, not even Buffet has been able to successfully and consistently do this over multiple businesses or stock market cycles. It is a myth to be able to catch the tops and bottoms. Majority of investors have and still keep losing money in trying to time the market.

Follow these 5 basic stock market tips before buying shares and reap the benefits of higher returns on your investment.

 

Don't Settle For Less, Invest With A Long Term View

 

f:id:Niveza:20180424203149j:plain

                                    

Are you one of the investors who is getting sleepless nights because of falling market? If yes, you have to review your investment philosophy, like immediately. The reason why investors like Rakesh Jhunjhunwala and Warren Buffett look forward to the market corrections is that it gives them an opportunity to buy quality stocks at discount. Expert investors often say - to get value out of your equity investment it is important to think beyond the investment horizon of a couple of years. In other words, they are saying have a long term investment view. As redundant and boring as it may sound, the old investment wisdom holds true even at the present time.

Think of it this way. You have bought good stocks/Mutual Fund after doing extensive research. Now all you have to do is hold them for a long, long time. Only by following this method will you get the wholesome benefits on your capital.

Herd Mentality - A Recipe For Disaster

What is a trend? A trend a thing that is done/performed by a big number of people at the same time. When a certain style makes a prominent presence, it becomes a trend of the season. In the same line, there are stock market trends. However, when a 'trend' comes to stocks it becomes very dangerous. In the stock market, a particular sector draws huge buyers which ultimately makes the sector a trending sector and the stocks in the sector, trending stocks.

If you take a close look at the stock trends you would realise that the element that drives a trend is herd mentality. This is the very reason we call a "stock market trend" an extremely dangerous phenomenon. People, while following a herd, buy a particular stock not because they are convinced about company's fundamentals but simply because someone else is buying it.

In such situations, people don't do any analysis of the stock. Following a stock trend is akin to driving a car blindfolded. It's destined to end up in a disaster.

Beat The Market Volatility With Long Term Investment View

Volatility is virtually a synonym of stock investment. In a way, short-term investors, intraday traders are the people who gain or lose money only due to the market volatility. The high returns come here at the expense of high risk.

Long term investors, on the other hand, are at an advantage in this regard. As they are focused only on the long term stocks which have long-term potential, they automatically disregard the short-term roadblocks which every stock goes encounters in its life cycle. On the other hand, some companies' stocks look very volatile in the short-term but give great returns in long term. Therefore, we can say that long-term perspective drives you clear from all the roadblocks of short-term investment.

Look At The Big Picture

Forget the 'risk' factor, here's an example which explains how short-term investment perspective can fail. Imagine you have a Rs.1 Lakh and you invest it in stocks with a short-term horizon of 6 months. After six months, your vision turns true and you get 25% returns on your invested capital effectively taking the value of your capital to Rs.1,25,000. To get 25% returns in 6 months is a big deal. An ordinary investor would simply go ahead and book the profits. Most of the investors would do the same.

Here comes the catch, when people see big profits then totally disregard the fact that the same stocks can give better returns.

The problem with booking early profits on good stocks is that you don't get to extract the full potential of the underlying companies. Those stocks go-ahead to become multi-baggers and you miss out on 2 things - more profit and regular dividends.

 

 

You Think Long Term Investment Is Unglamorous? Think Again

f:id:Niveza:20180418184431j:plain

 

People say there is huge money to be made in trading. It is true, those who are successful at trading make tons of profits. However, the important point that people usually miss while reading these glossy statements is that only 2% of the traders are actually successful and make money. It means, if you are going to try your hand at trading, the odds are heavily against you. If you don't mind taking high risks and losing a considerable money in the process then you can have a swing at trading. After all, only after trading, you will know whether you are good at it or not.

However, many people don't have the risk appetite to take big-stake trades. Moreover, when you know that the chances of succeeding are so slim, a smart, thinking creature should immediately turn around and look for investment avenues which give not just better returns but also keeps the capital safe.

Can Any Other Medium That Gives As Good Returns As Trading?

The answer is - NO. No other medium be it equity, real estate or gold can be as effective as trading, in short term. But there are mediums which are far safer than trading. In trading, there is a huge risk to your capital. It is perfectly capable of wiping out your entire account if you haven't assigned a stop-loss. The best and the most effective method of getting good returns is long term investment in equity.

The Advantages Of Long Term Investment

Experience The Power Of Compounding - To put it simply, compound interest means the interest you get on the interest. You would be wondering how is it connected to stock investment? There are various perks of long term investment. On the long term basis, you get regular dividends on the stocks your holding. The dividend is a reward you get on your stocks from the company. The assumption here is that you have invested in companies that have good dividend yield rate. As the dividend is a bonus income, it's an opportunity to roll it over into other good stocks which, in future, will bring you more income. As you are earning income from the income it can be said that this is a form of compounding. This way you are experiencing the power of compounding in your direct equity investment. That a great deal, isn't it?

Pay Less Tax & Brokerage - The big benefit of long term investment in equity is that you get extensive tax exemptions. When you hold the stocks for more than 1 year, the tax is considerably less than what you will pay if you sell them before one year. These are the benefits of long term capital gains. Investors generally underestimate the importance of tax discounts and rebates. Due to their negligence, they end up paying more and miss out on rewarding opportunities. But if planned well, saving tax is just like earning profits. This is the reward that short-term investors and intraday traders miss out on as they don't hold their stocks for more than 1 years. Not only that, as intraday and short-term are way riskier than long term, the capital they invest in their trades also has to bear big risk as it has to live through the day-to-day market volatility. It will be safe to say that no other investment instrument gives tax and growth incentives like the long term investment. Therefore it's always better to buy when you are absolutely certain of the stock's fundamentals. Remember, every penny that you save is the penny you earn.

Peace Of Mind - One of the biggest and the most underrated advantages of long term investment is - peace of mind. Yes, this is not any monetary gain or tax incentive but this quality is important in the larger scheme of things. Trading, contrary to investing, is an affair filled with dramatic highs and lows which consequently have a toll on your health. It's stressful and prone to give anxiety to those who can't deal with high-stakes trades. Long term investment is about becoming a part of a success story of the company. As it is not about pocketing some profit and moving on, a person involved in the long term investment enjoys a possibility of getting advantages like bonus shares, split shares and regular dividends from the company. On top of that investors also gets plenty of peace of mind as they can rest assured about their capital which will only grow with the company.

 

Real Estate Investment: High Capital, Low Return

 

f:id:Niveza:20180417222153j:plain

Mark Twine had once said, “buy land, they are not making it anymore”. Through his witty remark, Mr Twine conveyed one of the most important secrets of investment — scarcity accelerates demand. We have reached a point, at least in the urban regions, where we are facing a serious shortage of land for residential purpose. That is one of the reasons that our cities are expanding so rapidly. There are many people pouring into cities every day and there is less urban and residential infrastructure to accommodate them. This disparity in demand-supply has triggered the property rates to shoot upward in most of the big cities and the small towns have been quick to follow the suit.

As real estate sector is capable of such dramatic price movements, it has been a favourite investment avenue for ages. There is little doubt that investment in real estate if done at a fair valuation, can bring handsome returns. Having said that, if you are looking at real estate in 2018, then it will be advisable to check other investment options like equity and mutual fund which promise better returns by employing less capital.

Real Estate Investment Is Good Because:

Real Estate Is A Safe Investment - Real is a traditional investment class. It enjoys the tag of 'safe investment' like gold. While you are investing in gold, it is considered, that the value of gold will not fall beyond a point. This theory holds true in real estate, too. A look at the graph of real estate prices will show that it always trend upward. Of course, there are phases where the prices go through a certain consolidation, but slowly and steadily the prices of real estate always go higher.

Property Rent: Recurring Income - One of the greatest incentives of real estate investment is that when you buy a home or a shop you can let it on rent until the time the prices of the property reach the point where you want to sell it. The recurring income that you get as rent is like a dividend on your investment. You get the opportunity to invest this income in productive investment instruments like mutual fund through SIP. Moreover, when you let out a property on rent you also get a lump sum deposit amount (usually a rent of few months) from the tenant. As the deposit is refundable, you can invest it in stocks or fixed deposit and get additional income until the time you hold it.

Real Estate Investment Is Bad Investment Because:

Real Investment Is Highly Expensive — It goes without saying that to invest in real estate you need to have big money. Buying a shop or a house can cost approximately from Rs.8-10 lakh and the price tag can go up to any level as there is no upper cap. Furthermore, when you purchase a home in a developed neighbourhood, it will be expensive and will make the return on your investment low as the rates of that locality must have already reached the saturation point. Real estate is an expensive business unlike equity and mutual fund investment where you can start investing with as low as Rs.500. Even the old investment medium like gold is cheaper to invest in.

Real Estate Market Is Illiquid — The easy availability of buyers and sellers means liquidity of the market. The real estate market is known to be highly illiquid most of the time. This state is not because there is a lack of buying intent or ability or availability of funds but only because of the complicated nature of real estate trades.

Let me illustrate this point with an example. If you want to sell a house property you had bought as an investment, you will have to publish an ad in a newspaper on a real estate portal or you will have to hire a broker. Then interested parties come to see the property and take a long time to reply. Thereafter, there are numerous rounds of negotiations about rates. While this going on, there is always a possibility of a deal not working out at any stage. Similarly, the journey of buyers is equally tiresome. All this goes on to show that that the real estate market is highly illiquid.

Can Equity Outperform Real Estate?

Before comparing real estate with other investment instruments like equity and mutual fund, we have to understand whether returns on real estate can be any match to equity.

To illustrate this point there is a popular story of Rakesh Jhunjhunwala. It will correctly place the difference between equity and real estate.

Ace investor Rakesh Jhunjhunwala was considering the idea of buying a new home in 2005. He found a promising prospect in the posh suburb of Malabar Hill, Mumbai. The price of the home he had zeroed in on was Rs.27 Cr. To buy this home Jhunjhunwala sold some of his shares in Crisil.

Jhunjhunwala had been holding the shares of Crisil, a rating agency, for a long time. You may ask - so what's a big deal in that? He wanted to buy a home so sold his shares. The big deal happened a few years later. The stake that Jhunjhunwala sold in Crisil went on to become a multi bagger stock. The value of the stake he sold for Rs.27 Cr was approximately worth Rs.700 Cr in 2015.

In 2018, let's see where his real estate investment stands. Let's assume the property appreciated 200% (It's virtually impossible, though) which will make its value Rs.81 Cr. Still, against the blistering performance of Crisil, we can say that Jhunjhunwala lost around Rs.619 Cr. That's a big deal!

This story is a defining example of the power of equity.

Investment In Gold - Not As Glittery As It Looks

f:id:Niveza:20180405183112p:plain

To say Indians love gold is an understatement. Indians are obsessed with gold. From checking the price of gold every day to buying gold whenever the rates drop, Indians have certain fixation towards owning gold. Owning gold in a form of jewellery is considered a matter of pride. More you have it, wealthier you will be considered. The gold jewellery, without a doubt, is an asset, but when people start looking at gold as an investment medium, they restrict the growth potential of their capital. You may ask, isn't gold a good investment? Let's say it's not the best of the investment and in sometimes, it's a flat-out bad investment.

Let's understand what investment in gold has to offer.

Before we dissect the investment potential of gold, it will serve us well to understand what investment means. Investment is an act of placing your capital in a medium that will keep the value of your money (capital) at par with the inflation rate, at least close to it.

For example, if I have Rs.500 and buy 2 shares of XYZ Company. 15 years later the share price of XYZ company is Rs.2,500. That means my Rs.500 are now worth Rs.5,000. To conclude, investing in XYZ was a wise decision. In 15 years, it has given 1000% growth.

Coming back to gold, taking a cue from the above example, you have to ask - can gold grow with time? The answer is - it certainly can. The data of last few decades shows that gold has witnessed a steady rise over the last few decades. However, the important element to understand is what factors have propelled the price of gold? The historical data shows whenever there is uncertainty in the market or if there is any prolonged geopolitical crisis, the price of gold rise. In such situations, investors lose faith in all the asset classes and repose their faith in gold as they believe its value will not fall beyond a point. This is true, but it doesn't make gold a good investment. This quality only makes gold a perfect tool for hedging.

Things That Don't Work

Gold is a commodity. Gold is not a business nor is it a legal tender. It is just a precious commodity. If you study other investment instruments like equity, debt or even forex, there is a fundamental underlying business to all these investment mediums. The day to day price movement of stock and bonds is a reflection of underlying business activities.

To understand this concept better let's take an example of equity. When you invest in a certain company's stock, your money goes to the underlying company. There onwards the working efficiency of that company defines the value of that company's stock and also the value of your investment.

However, when we look at gold, the only thing responsible to move the price of the gold is this belief that someone will give it a higher price. It doesn't have a business, it just derives its value from this belief. In a way, gold is unproductive. It doesn't contribute to the economic growth.

Therefore any investor who wants to invest in gold should take a moment and check for other alternatives at his/her disposal i.e. mutual fund, direct equity investment, etc. A primary analysis will tell you that if you invest the same amount in the above-mentioned investment options there are chances that those options would give better returns than gold. As discussed above, the reason for the price movement of gold is the fear that other asset classes i.e. equity, bond, etc. will lose their value in future.

Still Interested? Here Are Some Alternate Routes To Invest In Gold

There are many people out there who would like to invest in gold despite being well aware of its shortcomings. For such people, the good thing is that it is not required to own your gold in a physical form. Owning gold in a physical form invites risks like theft of gold. Also, one has to make provisions for the safety and security of the of gold.

Ideally, you should buy gold in physical form only when you want to make jewellery. In a situation where you want to invest in gold then you should consider options like Sovereign Gold Bond or Gold ETF and for trading in gold, you can opt for commodity trading. By choosing these options, you don't have to bother about the storage and safety of the gold as you don't get delivery of it. However, you hold full ownership of the gold you get for your invested amount. It's just like buying actual gold minus hassle of its safety.

The Sovereign Gold Bond and Gold ETF follow the Indian rate of gold. Therefore, wherever the rates of the gold rise your investment goes up and vice-versa. The important point to remember is that these are not the mediums to beat the market volatility of gold.

Forex Trading: A Global Currency Game

f:id:Niveza:20180402152821j:plain

Trading is an exciting activity. Whether you make money or you lose it, it never fails to catch your attention. The reason it is so popular amongst people is that its potential of making big money. The professional traders often spread the stories about how they have made their fortune in trading in a short time. There are many traders who boast about their successful trades but the statistics suggest that only a handful of traders, 2% to be precise, make money in trading. The other way of interpreting this stat is that 98% of the traders lose money. That sounds scary, isn't it? In India, trading is usually done in equity, commodity and currency market. These are different asset classes. Amongst these three, Currency, better known as Forex Trading, is little different than the other two. Forex is a universal market where all the traders across the world trade.

Let's shed some light on the forex market and try to understand its potential and what traders/investors stand to gain from it.

 

What Is Forex Market?

The forex market is the platform where all the currencies of the world are traded. In the international trade, currencies are important. For the businesses and consumers around the world as currencies have to be exchanged in order to carry out international trades and business transactions.

Let's demonstrate this point with the help of an example. Suppose you are in India and you want to buy an iPhone from the USA. As you are buying the product from the US market, one of the parties involved in this transaction i.e either you or the merchant you are buying iPhone from has to make the payment in US dollars (Currency of the US). What it means is that the Indian importer of iPhone will have to pay the equivalent value of Rupees (INR) into US Dollars.

In the same line, if an Indian tourist is travelling in Africa, he/she would be unable to make transactions in Rupees as it is not a local currency. In order to make their travel experience hassle-free, Indian tourists will have to exchange Indian rupees for the local currency, in the case of South Africa, it would be Rand.

This transaction illustrates that two currencies were exchanged to procure a certain commodity. The above-mentioned example was about a retail transaction. There are many high volume transactions that happen between countries every day. As different currencies change hands on the day-to-day basis, the value of these currencies keeps fluctuating. This daily price movement is what triggers the trading in the Forex Market. All these points where travellers, traders, merchants feel the necessity to exchange currencies is the very driving force of the forex market. As a result, many currencies are exchanged in the international market and subsequently creates a demand-supply equation which ultimately stimulates forex trading.

Transactions like these which happen across the world at a huge volume create a demand and supply for certain currencies. As a result, the value of these currencies goes through price fluctuation.

The forex market is the biggest and the most liquid financial market in the world. The market size of the forex market makes other big asset classes like equity market and the commodity, which attract high volume every day, look smaller in comparison.

 

Forex Market Is A Global Market

The fundamental difference between the forex market as compared to stock and commodity market is that the forex market, being an international market, does not have a central exchange as it is Nifty, Sensex for equity and MCX for commodities.

In forex, all the traders are on a network which connects all the traders across the world on a digital platform. Due to this, there is no requirement of a centralised exchange. Also, trading is conducted electronically over-the-counter (OTC).

Another interesting thing about forex market is that it is open 24 hours a day for the five and a half days of a week. All the currencies are traded across the world. However, the main markets for forex are London, Hong Kong, Tokyo, Zurich, New York, Paris, Frankfurt, Singapore and Sydney - across all the time zones. This simply means is the time when a trading day in the U.S. ends, forex market starts again in Tokyo and Hong Kong. As it is traded across the continents all the time the forex market is able to stay highly active any time of the day, with price quotes shifting on the constant basis.

 

 

NPS: A Better Tax Saver Than A Retirement Fund Builder

f:id:Niveza:20180319204524j:plain

Are you saving for your retirement? If you are in your mid or late 30s and your answer is 'no' then it's a high time you should start investing. Many people think they are going to retire in their late 60s so they have plenty of time to start investing. The reason, you need a longer time span for retirement planning is that you have to save a huge corpus which will come to your rescue when your fixed income (salary) stops. Therefore, you have to think of inflation which will be much higher than it is now which will considerably reduce the value of your money.

To stay above the inflation you will need plenty of time. Hence, starting early is the best way to go about your retirement planning. Amongst many investment alternatives like a mutual fund, direct equity investment there is also an option of government-supported National Pension Scheme (NPS). There are a lot of opinions about NPS, at the same time, there are many people who totally rule it out from their investment portfolio.

Let's take a look at NPS, its features, advantages and drawbacks.

What is NPS?

National Pension System is the most famous Government supported pension scheme which is open to all the Indian citizens between the age group of 18-60. Launched in 2004 by Pension Fund Regulatory and Development Authority (PFRDA). NPS was initially only for the government employees, however, in the year 2009, after revising the rules of the scheme the scheme was opened for all the citizens of India.

The minimum annual contribution for this scheme is Rs.1,000. In the earlier stages of the scheme, the minimum contribution was Rs.6,000. NPS allows you to invest on a regular basis in a pension account during the period your employment. At the time you retire, you can liquidate a part of the amount that you have saved over the years while the remaining portion goes into buying an annuity scheme through which you get a lifelong pension.

Is It Good For Retirement Investment?

NPS is an investment medium created especially for retirement investment. However, on this counts, NPS fails miserably. To create a good retirement corpus you can't rely on any instrument that does not give 100% equity exposure. Equity investment is the critical element of the long-term investment.

NPS does offer equity option in the asset class E, but it only allows 50% exposure and the rest of your fund is invested in debt funds. Besides, there are stringent restrictions on withdrawal in the tier-1 account which limits investors' option to withdraw either amount at the end of the term and invest it in other better options which can give better returns like a mutual fund. Moreover, it's not any nominal amount but 60% of your corpus which you never get back.

In case investors get the entire amount in full they can invest it in better mediums i.e. mutual funds which will give them far higher returns compared to what the annuity scheme may give. Moreover, the biggest problem of the annuity is that it is wholly taxable. These are some of the points which make NPS an investment option which is not good enough to meet the retirement goals.

NPS: An Efficient Tax Planning Tool

Though NPS is not a good retirement investment alternative, the thing which makes special is its tax-saving ability. NPS allows not one but two tax deductions under 2 sections - Rs.1,50,000 under Section 80C and Rs.50,000 under section 80CCD. 

However, you need to plan your tax intelligently to make full use of it. To save tax section 80C go for tax-saving alternatives that not just save tax but also give better returns. ELSS is a fine example of that. In ELSS, you get a short locking period is of 3 years which is the shortest in any tax-saving medium. On top of that, your funds are invested in equity which increases the possibility of getting better returns than PPF and NPS. Therefore for deductions under Section 80C, you can choose a smart option like ELSS while for Section 80CCD, you can invest in NPS. The duel tax advantage is the biggest bonus of NPS, however, that's the only benefit of National Pension Scheme.