3 basic questions you should answer before investing.

Many people ‘play’ in stock market and as a result, lose their money. Playing with stocks requires basic understanding about finance , economics and accounting. Without those fundamentals, the market can be a very dangerous place.

Here’s a set of 3 basic questions you should be answering before you pick a stock-

DO YOU HAVE A VALID EXPLANATION FOR YOUR ACTIONS?

In every case, you should be able to write out a short, simple explanation as to why you are purchasing a specific investment and they should be logical and reasonable.

SHORT TERM MOVEMENT OR LONG TERM PERFORMANCE?

If you ultimately expect to earn your profits in the market because a stock is going to go up as investors find it more fashionable, rather than an improvement in the long-term performance of the underlying business, you are not investing. A better word for your action would be “gambling”.

IS YOUR INVESTMENTS LEVERAGED?

Margin debt is dangerous because it’s so easy to access. If you approach a traditional bank, you’re going to have to complete a myriad of paperwork, prove you have the cash flow to repay the loan, Give collateral security, go through a background check, and a whole lot more. With a brokerage firm, If you have Rs 100,000 in assets in an account, you can instantly borrow another Rs 100,000 to buy shares, effectively leveraging your funds on a 2-1 basis. The problem, of course, comes if stocks fall – which they are often prone to do. You must invest in such a way that no matter what happens in the financial markets, you and your family should have enough money to survive and also invest and participate in the recovery when it comes. The point is, you shouldn’t put all your money into markets in one go. And, you should not expose all your money into stock markets .

If you are determined to put as much capital to work for you as possible, focus your energy on generating more cash in your professional life either by working more hours, starting a side business, cutting expenses, etc. It may take you a bit longer to get to your ultimate goal. But it will still be a much shorter journey than if you are completely or partially wiped out as a result of borrowing against your securities.

Till my next article..

happy investing !

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  1. Investing vs Trading vs Speculation
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  3. The Broker’s role in investing.

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