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Investing in stocks September 9, 2006

Posted by topedgemonk in Finance.

I know many a person who burnt his fingers badly in the recent stock market crash. Everything is moving northward, even your milkman is making money on stocks and your barber gives you a hot tip over a hair cutting session! Voila! You are gonna be rich. You look like the only dumbhead in the neighbourhood who is not investing in stocks. Your newspaperboy who used to come on a bicycle is now having his own moped bought with the money he got from stocks! Before you know it, you would have lost all your money.
Ever heard this- when everything seems to be coming your way, you are in the wrong lane! Well, in case you still want to invest while the markets are at all-time highs, do yourself a favour and dont follow the tip of your friendly mechanic who services your bike weekly (after all he knows more about the auto sector than you,eh?). Invest in fundamentally sound companies that have all the strucutres in place to make money in the future. Understand that when you are buying a stock, it is not just the scrip that you are buying but you are buying a business. The amount of money a business is going to earn depends on a multitude of factors. You need to analyze each of the variables that could affect cash inflow or increase costs. You need to look at potential competitors, changes in the market trends, market share, alternatives, and you need to look even at the company’s customer’s customer’s cash flow. This is difficult to analyze for Indian IT companies, which is the major reason why I dont invest in that business. I just don’t understand it fully eventhough it looks so rosy like a shiny apple waiting to be eaten. Would you buy a business without understanding it fully? Without trying to understand every last nuance of the business? Why is it that then when it comes to stocks people invest in anything that has a futurustic sounding name and pray to god for it to go up? You must learn to read financial statements properly. If you know how to read finanacial statements properly, you will realise that each statement of accounts tells a story. And the better you are at reading financial statements, the better you will be at reading between the lines of the story.
Just because a stock has risen 200% in the past does not mean that it will give the same returns in the future also. You should check whether the same conditions that facilitated earning that sort of growth are still in place. You should buy a business and give it time to grow. Various studies have shown that in the long run, day traders would have been better off investing in the index. So, do your proper homework before buying a business. Happy investing!



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