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Sep 30, 2012

Think Before You Leap

Money Talk/ V. Devaki
image The stock market of a country is an integral part of the economy. An active market with appropriate response to different news/events is often seen as one of the indicators of the health of the economy. Hence, stock market sentiment is crucial many a times in the process of nation building.

Participation in the stock market,otherwise known as the equity market, is not limited to just traders and big investors and financial institutions. Anyone with an income can take part either through buying stocks or through mutual funds who make huge investments in a basket of stocks. Those who are planning to enter the market must be aware that equity investment means "High Return, High Risk". The return from the investment in the stock market depends on the performance of the portfolio and the overall market trend. In short, stock market investments do not guarantee returns. One could make profit, but there is also an equal chance of suffering a loss.

Here are the five basic things you should consider before deciding to make stock market investments:

1. Income It is always best to have regular income such as salary so as to plan the investment. The surplus left after making provisions for living expenses, insurance payments, loan repayments, other savings, taxes, etc. can be considered for investment in the stock market.

2. Age As life's commitments increase with the rising age, the ability to bear risk reduces. So, it is better to invest more in equity when young and reduce the amount going forward. One of the common rules of thumb for the purpose is 100 minus your age is the proportion of your savings that must be invested in equity. So, if you are 30 consider investing 70 percent of your savings in stocks.

3. Risk Tolerance This is essentially the ability to withstand a loss, which varies from person to person. It is also dependent on your age, income, etc.

For example, a young salaried investor may be more tolerant to risk than a retired person.

4. Time Equity investment requires planning and a fair amount of time. Entering a market with the expectation of a quick profit is equivalent to gambling. A good investor must be willing to set aside some time on a regular basis to study the market, track investments and be up-to-date with news. An easy way to know how long you must stay invested in a particular stock/market is to set a goal. ie. have an idea of what your investment must achieve within a specified time. Further, how you plan to make use of the returns.

5. Common Sense Always have realistic expectations from the stock market. Do not fall for offers of doubling or tripling the investment in a month or so.

Remember, returns can be never guaranteed from equity investments. One must not panic when there is a market crash, but be calm and plan your investment carefully. Similarly, you must not be overconfident when there is a boom, but think straight. As the legendary investor Warren Buffett says "Only buy something that you'd be perfectly happy to hold if the market shut down for 10 years".

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