Welcome to Sunil Gandhi

1 Why invest?

If you were to open a book on economics and look up the word “investing”, chances are that you would find the following definition: “Investing is building up to meet future consumption demands with the intention of making surpluses or profits, as they are popularly known.”

And after reading it, the last trace of your eagerness to invest is likely to evaporate.

But investing is essential. Here is why…

While the life expectancy of the average human being has increased, we are productive only between the ages of 30 and 60 years. Hence the short time span that we are able to earn money needs to provide for our future when we may not be capable of earning.

Everything being the same, we could keep away a part of our earnings every year (save) that will come in handy when we will not be able to earn. However inflation destroys the value of what we save. A sum of Rs10,000 saved this year will not have the same purchasing power ten years down the line. Hence we need to preserve the purchasing power of what we save.

The only way to hedge inflation is to invest in shares, debentures, bonds, gold or real estate, to earn returns from these assets that compensate for the decline in our purchasing power.
,br> Investing is not only very important, it can also be great fun.

Here is an excerpt from A Random Walk Down Wall Street by Burton G Malkiel

Most important of all, however, is the fact that investing is fun. It's fun to pit your intellect against that of the vast investment community and to find yourself rewarded with an increase in assets. It's exciting to review your investment returns and to see how they are accumulating at a faster rate than your salary. And it's also stimulating to learn about new ideas for products and services, and innovations in the forms of financial investments. A successful investor is generally a well-rounded individual who puts a natural curiosity and an intellectual interest to work to earn more money.
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2 What is a share?

“Share” or “Equity” represents part of an ownership of a business. So as a shareholder you own a piece of the action that happens in that business. Why would you want a piece of the action? For the rewards of course. As a shareholder you have a right over the profits generated by your business. Your company might pay out the profits generated every year as dividends or it may retain the profits to further grow them.

There’s another way you as a shareholder can make money. If your company does well, then its shares listed on the stock market become more valuable and the stock price appreciates. On the other hand, the company might perform badly. Then not only do you not get dividends but the stock price also declines. Hence investing in shares is a risky proposition.

When you invest in shares, you can expect certain returns based on the fundamentals of a business. However you have no control over it. What you have control over is managing risks associated with it.
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3 Why invest in shares?

We know now that investing in shares is akin to owning part of a business. A profitable business keeps ploughing back profits to earn more profits or should we say "compounding profits".

Hence unlike investing in assets like gold and real estate, which are not productive, or in bonds or debentures, which have fixed returns, investing in shares, which represent ownership in productive assets (business), hold very high upside potential.

The “power of compounding” is what makes investing in stocks very attractive. In very simple terms it means that the returns on the principal earn returns too. In other words, Rs100 that earns mere returns of 15% per annum becomes Rs250 in ten years whereas Rs100 compounding at 15% per annum turns out to be Rs405 in ten years!

As you stretch the time horizon, your money appreciates further. Compounding at 15% per annum Rs100 becomes Rs405 in ten years, Rs810 in 15 years and Rs1,640 in 20 years. Hence the longer the duration of investment, the better are the returns.

For instance, if you had invested Rs1,000 in HLL in March 1990, it would have been worth Rs40,000 in March 2001, ie it would have increased 40 times in 11 years.

Of course investing is risky. Higher returns always come with higher risks. However the risks of investing need not deter one. After all, the rewards outweigh the risks.
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4 What determines stock prices?

"In the short run, the market is a voting machine--reflecting a voter-registration test that requires only money, not intelligence or emotional stability--but in the long run, the market is a weighing machine."
--Benjamin Graham

Share prices track the profits of a business in the long run whereas in the short run they are determined by market sentiment and demand for the shares. Hence share prices are predictable with a higher degree of certainty in the long run whereas in the short run these are very whimsical.

Which is why the strategy for a trader who hopes to benefit from short-term prices has to be different from that of an investor who expects to benefit from long-term prices.
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5 How much does a share cost?

The price is set by the market and it all depends on how many buyers and sellers think the share is worth that day. Some stocks sell for less than Rs10 a share, others for more than Rs1,000 a share. But do not be misled that a Rs10 share is better than a Rs1,000 share since it is cheaper. That is not the way it works. Check our school article “Cheap Stocks Could Prove Costly”.

If you 're interested in buying into a particular company, you can find out the stock price by looking up the company alphabetically in the stock table section of any newspaper, or you can get a quote online at financial sites such as Sharekhan. Of course if you have an account with a broker, then you already know where to ask.J

A tricky question is what is the right price for a share. In order to get a better hang on that we suggest you explore the playschool!

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6 When am I ready to buy shares?

Before you decide to make your first share purchase, it helps to take stock of your net worth. Remember while investing in shares is lucrative in the long run, it is also risky.

Hence the money that you use to buy shares must necessarily be money that you do not need in the next five years. So you can start investing only when you have surplus money (after taking care of personal debts if any). Never borrow to invest in the stock market.

The critical point to remember again is that the earlier you start investing in shares, the better the returns you can generate.

The surplus money that you have should be invested wisely in shares to reap the rewards. A ship is safest in the harbour, but it was never built to stay anchored. Similarly, your surplus money is meant to create wealth for you. And it can’t generate wealth for you unless you invest it in shares.

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7 Can I put all my surplus money in shares at the age of 40?

Investing in shares is risky but also lucrative over the long run. Hence it makes utmost sense to have the maximum exposure to shares when you are young and reduce your exposure as you age.

There is another factor that compels one to reduce his exposure as he ages. As a young single executive one has a lot of surplus but not enough needs; but as one gets married and has a family he has a larger need for money.

There is a very popular thumb rule called “Rule of 110”. The rule suggests that one should deduct one’s age from 110 to arrive at the percentage of exposure one should have to shares. In other words, a 30-year old can have an 80% exposure to shares whereas an 80-year old can have 30% exposure to shares.
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8 How do I manage the risks associated with investing in shares?

Investing in stocks is risky since there are many uncertainties associated with the ability of a business to generate profits. Hence there is no control on the returns but an investor has control over managing her/his risks.

“Portfolio diversification” is a straightforward way to reduce exposure to business specific risks. It simply means that one should not keep all his eggs in one basket. Invest in a diversified set of stocks spanning different businesses. Equity risk does not add up as you spread the capital over a larger number of stocks.

Another way to handle risks associated with buying too high or too low at a given point in time is to spread ones investments across time. Never invest lump sum in the stock market. Spread your investments over a period of time. This is normally referred to as “steady investment plans” or rupee cost averaging.

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9 Can I invest in any share?

It is not how much you save but where you save it that holds the key to success. Similarly it is what share you buy rather than how much of it you buy that is more important.

After all, when you buy a share you buy a business. The returns you make are dependent on how the underlying business performs. Most people buy shares to sell it at a higher price in the market, but then the appreciation in stock price hinges on the earnings of the business.

True that during periods of extreme bullishness or bearishness, a stock price may move divergent to the earnings of the underlying business. But these differences always correct.

So before you invest in any share ask yourself a few questions on the fundamentals of the business. Ascertain the background of the business and of the people running it to ensure that the business keeps earning higher profits.
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10 I am ready to invest. Is there anything that I need to do before I buy my first share?

There are three rules to follow before you take your first dip in the investing waters:

Make a plan
Take into account your strengths and weaknesses
Review the plan often and change it as your needs and circumstances change

Follow these rules and you'll be able to sort out your financial needs.

If you don't know what you want your money to do, then whatever you read on investing will have no meaning.

All of us wish to be rich. But then, how do we actually get there? “Kaun Banega Crorepati?” or “Betting on Horses” is not what the stock market is all about. Done the right way, investing in shares can create wealth for you in a big way.

Here is how you can begin charting your way. It might seem a little pedantic but the exercise is worth the efforts.

Outline your personal financial goals.
Know your strengths.
Know where you stand financially.
Reduce debt.
Invest small, steady amounts regularly.
Don't put all your eggs in one basket.
Ask questions.
Plan for the long haul.

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11 How do I buy a share?

Unlike buying clothes from your favourite showroom where you just walk in, buy the stuff you like and pay for it, buying shares is a little different.

Shares are traded on stock exchanges and you can buy them only from people recognised/authorised by the stock exchanges to buy or sell shares. These people are popularly known as “stock brokers”.

In order to buy your first share you need to become a client of a stock broker. Since it is a very sensitive relationship, we suggest that you spend time to choose a good broker. Check our articles “How to Choose a Broker” to understand the process better.

Once you are a client of a broker, then it is as easy as shopping. Call up your broker, check the quotes of the stock you wish to buy and place an order. These days it is a lot easier to trade online. You could check the demo on our trading site to get a feel of how easy it is.

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12 How do I sell a share?

The same way you buy one, you just holler “sell” this time around. You call your broker and tell him or her to sell your shares (or you enter your sale with an online broker). You'll get the market price of the stock for that day.

But you shouldn't get into the habit of selling stocks frequently. You'll have to pay a brokerage on each sale, just as you do when you buy a stock. And that could eat up any profits you might make if the stock price goes up.

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13 What if the price of my stock goes down?

That can be an even better reason for not selling. The price of your stock is almost guaranteed to fall at some time. Maybe your company will go through a period when business isn't so great. Then there are times when the whole stock market goes down because people are less enthusiastic about holding stocks.

But the best way to make money in the stock market is to buy shares in good companies that have the potential to grow and hold on to them. Over time the stock market tends to rise, discounting the downward blips along the way. When a stock price drops, ask yourself if you still like the company and think if its future looks good. If the answer is no, go ahead and sell your shares. If the answer is yes, hold on and maybe even buy some more.

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14 What does “going short” on stocks mean?

If you buy a share with the expectation that the price will rise, you are "long" on the stock. On the other hand, if you expect the price of a stock that you do not own to go down you can even sell it. Then you would be going "short" on the stock. In case you are wondering how you can sell what you do not own, well, there is a system in the stock market under which you can borrow stocks just as you borrow money.

When you short a stock, you hope to repurchase it later at a lower price and then return the shares to the owner and keep the difference. Shorting not only offers you a way to make money if a stock goes down, but it also acts as a hedge against falling markets. Of course traders who hope to benefit from any trend in the stock market, use “short” positions to make money in a downtrend.

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15 What is the difference between “investing” and “speculating”?

Here is the doyen of investing, Benjamin Graham expounding on the distinction between these two activities.

“An investment operation is one which, on thorough analysis, promises safety of principal and a satisfactory return. Operations not meeting these requirements are speculative.”

That is a very brief reference to speculation. We could amplify it a bit by saying that in speculative operations a successful result cannot be predicated on the processes of security analysis. Speculative operations are all concerned with changes in price. In some cases the emphasis is on price changes alone, and in other cases the emphasis is on changes in value, which are expected to give rise to changes in price. I think that is a rather important classification of speculative operations.

Need we say more to help you distinguish between the two activities?

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16 What are the common mistakes an investor should avoid?

Panic selling

There is one certainty about investing in shares--that there will be a number of market panics during your investment lifetime. What you do during a market panic has a great impact on the eventual wealth that it creates.

Suppose you fall victim to panic selling, you hesitate from buying rapidly when the stock recovers. Haven’t we all experienced panic selling some time or the other? Maybe in the wake of some negative political developments, eg a “no confidence motion” against the government? We have sold our holding fearing the stock price would tank, only to wake up the following day to discover that our fears were unfounded. We would then helplessly wait for the stock price to retreat below our selling price. And instead you'll be on the sidelines for a fairly long while, recovering your courage to be able to buy again.

Your emotional healing process will be enhanced when the prices rise again. Nothing heals like rising prices in the stock market.

Most people who sell near a bottom fail to re-enter the stock until well toward the next top. This creates a very vicious cycle of buying at market tops and selling at market bottoms.

Never selling

Many investors fall into a trap by misinterpreting the “buy & hold” concept. Buying and holding forever will not prove wrong every time, but it is a far from perfect approach in most cases. It is based on false assumptions (either stated or unconscious) and proceeds from laziness and inertia. It also flows naturally from having no plan.

Buying and holding forever is based on four assumptions, all of them false:

The world will not change for the rest of my lifetime
I and my needs will never change as the years pass
I always make good buying decisions
Stocks, bonds and funds will rise at a steady pace forever.

Considering how quickly all these assumptions change, we seldom make a buy-to-hold-forever investment decision upfront. The “holding forever” syndrome creeps up on us afterward when the stock price declines after we purchase it. In most cases, the “buy & hold” concept gets dictated by the price of the stock. If the price happens to be lower than the purchase price, then many people commit the mistake of holding on without bothering to check if the reasons for buying the stock have changed to make it a sell.

Investing in cheap stocks

Many of us believe that it is easier for a Rs5 stock to appreciate to Rs30 rather than for a Rs100 stock to appreciate to Rs600. In reality, nothing can be so far away from the truth.

It is true that cheap stocks that survive give excellent returns but the failure rate is extremely high. Hence picking the right cheap stock that will fetch those extraordinary returns is like finding a needle in a haystack. The high risk ensures that buying cheap stocks can prove very costly.

Investing on tips

Tipsters are fair weather friends. All of us spend some time researching various car models/brands before making our purchase. We do that despite well-meaning suggestions from our friends.

Whereas while buying shares of a company, many investors buy shares worth a few cars like there is no tomorrow in the stock market. Many of us who have seen one complete bull and bear cycle in the stock market know the devastating effect it can have on one’s net worth. Aditya Forge, Kuanl Overseas, Atco Industries, Pentamedia, DSQ biotech--we could have almost filled up this entire section with names of these hot tips that went bust.

Timing the market

Many wannabe investors extend the “buy low, sell high” argument to wait for the lowest price. In the process, they miss out on a buying opportunity and compound the mistake by actually buying at peak prices after getting tired of waiting.

We believe that it is the “time in” the market and not “timing” the market that is important, just like it is not important “how much” you invest in a stock but in “which” stock you invest.

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