Ahead of festive season this year, the stock markets are buzzing again! The Sensex closed above the 17000 mark for the first time since May 21, 2008. As discussed in our earlier post, Stock Market – Is the worst over?, it will pay to remain cautious and keep a close track of events both globally as well as domestically.
Speaking of being cautious, there are many questions which you might have regarding choosing which stocks to buy or sell? How long to hold on to stocks? Or How safe are investment in stocks? We have tried to put things in perspective for you to make the best decisions.
Which stocks to buy and sell?
Buying and selling stocks involve a fair amount of research. These involve assessing how well the company is managed, how the company is performing compared to others in the industry, how the industry itself is doing, the financial performance of the company, the interest of the general public in the company, etc.
One such measure used by investors for valuing stocks is the price to earnings ratio (P/E ratio). It is probably the most popular indicator which denotes the ratio of a company’s stock price to its earnings per share. To know more, read our earlier post Understanding P/E Ratio.
Our suggestion, it is best that you consult an expert in such analysis, before you decided to buy or sell a particular share. Such investment advice is provided by your wealth manager, investment advisors, and also your share brokers and brokerage firms.
How long to hold on to stocks?
Historically, it has been demonstrated that investments in equities offer the best long term returns and hence the highest opportunity to enhance your capital. Thus, the longer you stay invested in the equity markets, the better will be your returns.
However, this holds true for the equity market as a whole, and not necessarily for stocks of individual companies. The value of stocks of specific companies are subject to various pulls and pressures which could cause a share that is highly valued one day, to drop its value overnight, as a result of unpredictable factors ranging from business performance of the company, investment interest of Foreign Institutional Investors (FIIs) or Domestic Institutional Investors (DIIs), Government policy, acts of omission and commission by the management of the company.
It is advisable that you periodically evaluate your holdings and decide whether to continue with them or change them. It pays to keep a track of your investments in equities and market linked securities. There are several online portfolio tools available that helps you manage your investments free of charge.
However, one very important thumb rule which the professionals offer is, never to get emotional about a share because Investing with emotions, is a serious error. In other words, do not hold on to the share of a company whose value is declining, just because its history has been very good!
Are investments in Stocks safe?
Any investment is prone to a certain degree of risk. Stocks, as a class of investment have the highest element of risk. These risks arise as a result of factors described in our earlier post Understanding Investment Risk.
The only services riskier than shares are lotteries and other games of chance. However, today there is strong legislation, procedures and a regulatory authority – Securities Exchange Board of India (SEBI), which to a large extent prevents risk as a result of misleading the investing public.