Things To keep in mind before investing in equity

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It’s far better to buy a wonderful company at a fair price, than a fair company at a wonderful price. – Warren Buffett Today, there are a variety of investment vehicles available for an investor to park his/her money. For e.g.- online stocks, mutual funds, gold bonds, debt funds, and other exchange-traded funds. However, it is not easy to make a decision as to where the funds must be parked and how much investment must be made in a specific category. This occurs because, based on numerous circumstances such as market timing and feelings, some paths can lead to profit generating while others can lead to losses.

Stock investing requires thorough research and a careful study of the company’s cash flow statements, financial data, ratios, operations, debt, and a lot more.

When it comes to investing in stock markets, Benjamin Franklin’s quote, “An investment in knowledge pays the best interest." stands true at all times.

Analyzing all of the information that is readily available in the reports provided by the certified analysts of broking houses or on company’s own website are the two finest ways to get to know about the company. This includes, but is not limited to, the company's profit and loss account, balance sheet, financial ratios, stock price movement charts, weekly highs and lows, and other financial characteristics which are widely accessible on stock exchange websites. Moreover, you can access mastertrust’s website to get more knowledge on various aspects related to trading and investing.

Here are a few points that must be kept in mind before investing in equity:-

  1. Make your financial plan

Before making an investment in equity, one must analyze his/her own financial situation and decide the category of stocks one wishes to invest.

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  1. Decide your risk appetite

The next step is to decide the extent to which one can take risks. All investments involve some degree of risk and it is vital to understand this aspect carefully. While analyzing the risk, the reward must also be considered and a final decision must depend on the risk-reward scenario of a particular stock.

  1. Do an Industry analysis

Research the reports and acquire knowledge of the industry in which the company is operating. Next, study how the company is performing and what is the growth potential of the company. Study all the segments of the company and review the historical data and financial performance as well. Check for the past and futures trends of the company and go through its latest annual and read this section carefully.

This will help an investor to identify the sectors and the industry as a whole and how the company is performing in the industry.

  1. Understand the company’s business model and operations

Every company is required to publish its annual reports, quarterly results and other reports from time to time. Investors must read these reports carefully and study the details like the promoters, management, business operations, Corporate Governance Report, Risk Management Report, Shareholding Pattern, and other data (both historical and present) to know the detailed performance of the company.

Based on this data and a thorough comparison with peer group companies, one can make a decision of investing in the company.

  1. Do not follow the herd mentality

Unlike many investors, refrain from indulging in market rumors and gossip and avoid herd mentality. Do not buy stocks on a hear-say basis or just by listening to the scrip’s name from any of the friends or family members. Do not invest in the company if you have not done your own research and studied the industry trends carefully. Knowledge is the key and one must only invest in scrip that he/she has complete knowledge of.

  1. Review the financial performance of the company

There are several ratios that must be studied and analyzed carefully to understand the financial performance of the company. Additionally, various financial documents like the balance sheet, profit and loss account, and cash flow statement must also be studied diligently in order to know about the liquidity, efficiency, profitability, and valuation of the company.

The financial performance of the company must be compared with other peer companies and competitors so as to make a complete data analysis and to finally make a decision of investing in the company.

Finally, Keep track of national and international events that have a significant impact on the SENSEX and NIFTY.