Equities as an Asset Class

I'd like to share some basics in share trading and investing. Some of these have been taken from several media and some are my personal opinion. I'd like to strongly insist that you do not follow these blindly and do your own proper research before trading and investing in shares. The blog is intended to those who want to act as fund managers to their own funds. Some of the information is written from an Indian market perspective. I welcome your comments or remarks.

Identify the purpose:
Identify the purpose as why you want to enter into the equities asset class. For example, you want to create a nest for your retirement, for providing higher education to your children, build a dream house or just want to increase the wealth.

Risk and reward:
Equities as an asset class is inherently risky. It is possible to loose all or part of the money you have put in equities. But there is also the possibility of rewards that come with the risk. This is the most important aspect one has to take into account before getting into this asset class.

Funds allocation and time frame:
Consider how much amount you can comfortably allocate to this asset class. Also consider the time frame that you can be sure of not relying on this allocated funds. There are numerous scenarios that could be considered but for illustration purposes let us consider the following scenarios.
Scenario 1: Person A is comfortable in committing Rs.100,000 and does not need this money within the next 3 years. This money can be carefully traded/invested in equities asset class with a good chance of beating the returns offered by standard bank interest rates. The time frame allows opportunities to meet reasonably set targets and also doesn't force the individual to make hasty decisions should the market doesn't behave as expected.

Scenario 2: Person A is comfortable in commiting Rs.100,000 but requires this money without fail within the next 3 months. It is quite risky to enter into equities asset class for such a short time frame. It may be better to keep the money parked in a bank account.

Scenario 3: Person A can allocate Rs.100,000 towards equities but may require the allocated funds with very short notice, say, a week or a few days. It may not be adviseable to enter into equities if there is uncertainity about the time frame for which the funds can be allocated.

Trade or invest:
There is widespread support for both trading and investing. Personally, I’d call money parked in shares for more than a year as an investment and anything less than that as trading. There are many books on financial investments and one can read these books at their own leisure. My personal opinion is that if one can identify a potential multi-bagger (means the share price increases several fold in the long term), then staying invested for years together could be very good.

Lost Opportunity:
As anything in life, do not worry about the lost opportunity to make money or minimise the losses. Treat it as part of your learning experience and try not to repeat.

Setting Targets:
Set reasonable targets for the money allocated in equities. As a minimum, this target should beat the official inflation figures by at least 10%.

Terminology:
Get used to the terminology. Understand what is m-cap, P/E ratio, EPS, Face Value, Book Value, Dividend, Dividend Yield, Price/Book Value, Dividend Announcement Date, Dividend Effective Date, etc.

M-cap groups:
The companies are grouped as large, medium and small based on their Market Capitalisation. Understand the risk/reward associated with the companies in these groups before committing the funds.

Do Research:
The reason why you buy shares of a particular company is because you want to share its profits. So do good research about the company. Some of the things to consider are: owner(s) or promoters, directors, companies past performance, future plans, their financial position, how they compare against their peers, etc.