How to start investing in stocks and trading, can you give a basic 101 guide to 18 year old ?
Ans: • Categorize stocks as Cyclical, Growth or Defensive Cyclical
• Investing in cyclical stocks — cement or steel, requires an understanding of the economic scenario.
• An active involvement is required in order to reap the maximum benefits of swings in economic cycles over time.
• The stock prices are likely to move through extreme highs and lows, and the ability to time entry and exit will be necessary.
• Categorize stock as Cyclical, Growth or Defensive Growth
• Growth investing is investing in sectors where the future direction is clear for the medium term – such as technology.
• Timing is key, the stock may do nothing for a long time as momentum builds up and then move sharply thereafter.
• Categorize stock as Cyclical, Growth or Defensive Defensive
• Defensive investing is done from a long term perspective.
• It is investing in sectors that grow consistently and on a sustainable basis over time, such as Pharmaceutical
• Appreciation may, at times, not be as dramatic as cyclical or growth stocks. However, stocks that constitute defensive investments are expected to grow steadily over longer time periods.
• Check market activity
• Being able to sell is as important as buying. The liquidity of a stock is very important in taking an investment decision.
• Look at the price volume relationship for a stock.
• If a stock price is moving up or down on high trading volume, it is more likely that there is real interest in that price movement than if there is very little volume supporting the price move.
• Know the business you buy
• The performance of each stock is linked to the underlying business, and the market’s perception of the future prospects for that business.
• Study the future potential in terms of demand & supply and the company’s competitive position in the industry.
• The business model of the company should have the ability to sustain growth and momentum well into the future.
• Study the company’s performance
• Look at the year-on-year growth in the company’s performance.
• Look at the price earnings (P/E) for arriving at comparative valuation.
• Finally, look at return on equity (ROE), which is the year’s earnings divided by the net worth of the company.
• ROE compared to the cost of capital allows the investor to gauge the company’s wealth creating ability.
• Set a price target
• Set expectations, by identifying a target price, and re-evaluate the stock when this target is reached.
• If there is a loss on a stock and does not show potential to rise, sell.
• By not selling out of low return stocks to get into higher return stocks, you miss out on opportunities.
• Tracking your investment
• Tracking your investment is as important as buying it.