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Thursday, 24 January 2008

Five Rules For Investing In Equities

A lot of investors go about their investments in an illogical way. They are given a tip from their broker on basis of some rumor or news. They impulsively buy the scrip and afterwards wonder why they bought the stock.

Such Behavior is foolish and must be avoided. The moment you receive a tip on a stock, confirm the news on Reuters or other business websites. The news, if any, will be on these sites; be it dividend payoffs, announcements, earnings, corporate move to buy another company, fight of top management or any other news.

Broadly one should abide by following guidelines:-

1. Business of Company

Buy stocks of only those businesses that you understand. Once you have bought a stock, keep watch on quarterly results of that company and also keep watch on the general trend in the sector of that stock.

2. Study the past performance

All companies present particulars of their fiscal operation in their yearly reports. Study their past performance and then invest.

3. Know the promoters

The Management team and promoters of a company are key people who bring growth to a business. Invest in companies that have good promoters, experienced management, and where promoters hold more than 40% of the shares.

4. Future outlook of the company

Although a company could have done well in the past, it is not necessary that it will carry on performing well in the time to come. Keep a close watch on sector trend and market trend. You can know this by reading views of financial experts.

5. Stock price

The share price of each company fluctuates continuously on the stock markets with investors buying and selling the shares. The cost at which a person is conformable to buy or sell a share of a company is the perceived value of the share of the company taking into consideration the company's present business and future business growth. Besides this, investor sentiment plays a large role in pricing of stocks. It is important that prior to buying a stock, you evaluate whether the price of that share at which it is available for purchase, is adequately valued i.e. it is not over-priced. Similarly, when you sell, you need to be sure that you are not selling dirt cheap. To help you evaluate this, you may apply a popular ratio called the Price/Earning ratio (P/E ratio). The P/E ratio is based on the following formula:

P/E ratio = Market price of the share/Earning per share (EPS)*

*EPS = Profit After Tax (PAT)/ Total number of shares issued by the company

{"/" means divided by}

You can find information on the EPS, PAT and total number of shares issued by the company from its annual report. Once you have bought a stock after doing sufficient research, then you must not sell the stock in hurry if it falls by 5-10%.

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