Getting started with equity investments

John Maynard Keynes said, 'Don't try to figure out what the market is doing. Figure out a business you understand, and concentrate' . Investing  in stocks is more a science than an art. There are certain ground rules which investors must follow to be successful. Even before you decide to invest in stocks of individual companies, it is pertinent to have a proper asset allocation plan, that is, what portion of your portfolio should be dedicated to equity. If you belong to the category to investors who do not have the time to monitor investmentsclosely, you would be better off investing in an equity mutual fund rather than picking up individual stocks.



If you want to design you own portfolio, here are some points to help you get started: 



Identify your comfort zone 



Are you an investor who would likes to be defensive or are you an aggressive investor? The choice of stocks would depend on what you are willing to own. Would you like to invest in a blue-chip with a stable business and regular dividends, or would you rather look for a mid-cap company which is tomorrow's possible bluechip ? Are you chasing growth, looking for value, or would you like to have the best of both? Identify your niche and then go for the appropriate companies. 



Buy value, not momentum 



Do not rely on tips or 'hot picks' to build your portfolio . When you decide to invest in a company, it's important that you see value in that investment. For a start, understand the business of the company, check the credentials of the management, study the earnings, profits and growth of the company, the outlook of the sector or industry in which it operates , performance vis-a-vis its competitors etc. Research the company through various research reports available and study the balance sheet of the company. It's important to recognise the difference between the price of a stock and its value - that is what you are paying for the stock and what it is worth. 



Diversify 



The age-old wisdom of not putting all your eggs in one basket applies to equity investments too. You may have a liking for a particular sector but it's always prudent to diversify. Study the outlook of different sectors from a macro perspective and if the prospects of certain sectors are particularly good, try and identify the best companies to invest in, in those sectors. This would be a 'top-down approach' to investing. 



Think long-term 



Warren Buffet says, 'If you don't feel comfortable owning something for 10 years, then don't own it for 10 minutes' . When you are investing in individual stocks, in the short-term , their prices will be governed by the market movements. Irrespective of whether the movement is positive or negative, stick to your company, unless something has gone fundamentally wrong. If a business does well, the stock price is bound to follow. Do not take decisions based on rumours or pessimism - there is no room for emotions while investing. 



Monitor investments 



Once you have built a portfolio of individual stocks, it is crucial to monitor them and continue to study the earnings, profits and growth plans of the companies. You may have made a mistake in your selection. It would be prudent to admit it and make amends to the portfolio. Do not hesitate to cut losses on worthless investments. Don't hold them endlessly in the hope that they may redeem themselves in future. You may be losing a better opportunity. 



Equity may be a high risk investment, but actually, risk comes from not knowing what you are doing. If you spend time and effort on building a portfolio of potential stocks, the rewards will be well worth the investment of time, effort and money.