Investing in the stock market can be rewarding if you make the right long-term decisions.
Here are five factors to consider when investing in listed securities.
things to consider when buying shares
When investing in listed securities, it is important to calculate the expected return.
Expected return can be in the form of interest or dividends, but it can also be in the form of capital gains or losses.
To minimize the risks associated with your investment in your chosen type of security, you should follow these basic steps to understand the risks and rewards before investing.
understand the time frame of your investment. brainly
It is important to be clear about the duration of your investment; whether it is long-term or short-term.
Generally, an investment that will be liquidated within one year is considered short-term.
Investments madeoverf more than one year are considered long-term.
The classification into long-term and short-term investments varies according to the type of financial instrument and is taxed differently.
Short-term investments can be sold after reaching an expected return, e.g. 10-15%. In the long term, investors can invest mainly in shares of strong companies, as this sector is expected to perform well over the next five to ten years.
The shares of these companies are commonly referred to as blue chip stocks.
Well-managed companies with a solid financial history are generally considered to be fundamentally strong.
Review your investment portfolio regularly.
The investment portfolio is the basket of all investments made by the investor, and this portfolio must be constantly monitored.
Financial markets are characterized by their dynamism, and timing is paramount when investing as well as when selling or liquidating an investment.
For this purpose, the investor may also use the services of investment professionals, commonly referred to as portfolio management services (PMS) or certified financial planners (CFPs), to constantly seek or determine the performance report of his portfolio.
Analyze the quality of the firm's management and past track record.
For equities and debt securities, review financial performance such as:
income from operations vs operating profit
Net profit of the company after is taxes, the profit of the company before deduction of interest, taxes, depre,ciation and amortization, also called EBITDA.
Debt-to-equity ratio, refers to total debt and financial liabilities as a percentage of equity
- For equity instruments, see key ratios such a: Price-earnings ratio, also calledthe price-earnings multiplier, which Indicates the amount of the price an investor is willing to pay for the dividend of a company's stock.
- The ratio of price to boo value, also called multiple book value, which indicates the net value of assets after deducting liabilities per share.
- Evaluating these two ratios can provide insight into whether a stock is overvalued or undervalued. When analyzing such ratios for a large group with multiple companies, such as acquisitions or subsidiaries, you need to consider the total value of all combined companies or the consolidated performance results of all subsidiaries, rather than analyzing each company and its individual results.
- For debt instruments, review details such a: The company's credit rating, which provides information about the creditworthiness of the company being invested in.
- This rating allows the investor to analyze whether the company in which he is investing is capable of meeting its obligations.
- financial obligations that reduce the risk of default on principal or periodic interest payments.
define investment liquidity
The liquidity of an investment refers to the speed with which an investment can be redeemed or converted into cash. Liquidity can be achieved by selling on the stock market or redeemthe ing at maturity of the instrument.
The liquidity of an investment can be assessed by the following factors:
Insurance periods of the investments.
The lock-up period refers to the period during the investment cycle when the investor cannot transfer or liquidate the investment.
Costs related to the liquidation of an investment.
These include, but are not limited to, the following costs:
Brokerage Fees - Brokerage fees refer to the fees charged by the broker to the investor for providing transaction services. The brokerage fee or price varies from broker to broker. However, due to intense competition and discounts on online trading platforms, brokerage fees are now as low as 0.1% to 0.25% of the transaction value.
Securities Transaction Tax - The Securities Transaction Tax ( STT) is a tax levied on the purchase and sale of listed securities. The STT tax is generally 0.1% of the transaction value for equity transactions and 0.001% of the transaction value for mutual fund transactions.
Redemption Fees - Mutual funds may charge investors a redemption fee when selling or redeeming mutual fund shares. This fee is calculated as a percentage of the amount sold. The redemption fee typically ranges from 0.25% to 1% of the redemption price.
Hidden Costs - There may be hidden costs associated with liquidating your investment. These include the difference between the purchase and sale price for stocks and the difference between the net asset value and the redemption price for mutual fund shares. The net asset value refers to the unit value of each mutual fund, while the redemption price is the realizable or saleable value of each unit in the mutual fund.
Other Factors - You should consider market depth, which reflects regular trading volume and means that there is sufficient buying demand from other investors in the event of a sale. This market depth is affected by such factors as the volume of daily transactis in a particular security and the number of shares outstanding, i.e., the number of shares available to investors (other than holders of promoters).
Investors who deal in Indian equities but are not Indian nationals must ensure that their investments comply with the provisions of the Foreign Exchange Management Act (FEMA). The transfer of capital to and from foreign countries by non-resident investors, also known as repatriation, is strictly regulated by FEMA.
Volatility (equities vs. equity funds vs. bond funds)
Volatility refers to the range or frequency of fluctuation of an investment. The greater the range or frequency of fluctuation, the greater the risk of gains or losses.
Equity-oriented funds: consist mainly of diversified equity holdings with a small proportion of debt securities. Such funds have high volatility, but not as high as net equities.
Debt-oriented funds: consist mainly of debt holdings with a smaller proportion of equities. These funds have lower but higher volatility than debt securities.
Analysis of risk and rAny investor needs to understanderstand what type of risks their investment poses. Investments in traditional instruments such as gold, fixed bank deposits, savings bonds, and government bonds provide lower returns compared to listed securities, but also carry less risk.
On the other hand, listed securities have the potential to generate above-average returns compared to conventional or traditional instruments, but at the same time carry higher risks.
Equity Instruments: The price of equity instruments tends to fluctuate more than debt instruments and, therefore, is associated with relatively higher returns and higher risks.
Debt instruments: they are generally characterized by relatively lower risk and lower return as they generate fixed income and lower default. As the default risk is lower, the resulting returns are constant but lower than for equity instruments.
Derivative instruments: they are very risky and speculative, but can generate exponential returns, require a high level of experience,e and are generally not recommended for ordinary investors. The underlying value is derived from securities or commodities, and derivative instruments require in-depth knowledge and tracking of securities.
how to invest in stocks
You can invest in both stocks and debt, either directly or through mutual fund shares. Four simple steps to investing are:
Step 1: Register with a stock broker
Step 2: Open your Demat account and trade
Step 3 - Select the securities you want to invest in for your portfolio or choose mutual funds to invest in.
Step 4-Start the investment
Time horizon
- Time horizon refers to the amount of time a particular investor expects to hold their investment before selling it. The time horizon depends on various factors, such as:
- Equity instruments: Equity instruments are generally suitable for long-term prospects and when current income is not a major concern. This is mainly because equity instruments may or may not provide regular returns. For example, a capital increase, which means an increase in the value of an investment, can bring significant returns if these investments are held in equities for a period.
- Debt instruments: Since debt instruments yield fixed periodic interest income, they are more suitable for regular and guaranteed returns.
- Derivative Instruments: The trading cycle of derivative instruments usually spans three months at a given time, i.e., the current month, the following month, and the month after that these derivatives expire or expire. Since such investments can be made for up to three months, they are short-term in nature.
- Before deciding on the time horizon of your investment, you should consider three important factors.
- Cash flow needs - regular income or capital appreciation (which implies an appreciation of your investment), acquisition of real estate or other assets, and loan repayment obligations.
- Age profile - current income level, future income stream, retirement p, planning, and related issues.
- Yield - long-term investments yield higher returns. Especially for debt securities in general due to the compound interest effect. This means that the income earned on these debt instruments is reinvested to provide a return on both the accrued income and the original investment.
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