STOCK INVESTMENT

What is an investment?

Investment refers to the strategic allocation of monetary resources with the expectation of generating a positive return or gain over a specified period. This allocation typically involves the acquisition of assets, which can be broadly categorized into financial assets such as stocks, bonds, and bank deposits, or tangible assets like real estate, gold, and silver. The objective of investing is to optimize the deployment of funds in order to achieve growth, capital appreciation, or income, depending on the nature of the chosen assets and the investor's financial goals.

In a more simpler language, Investing is like planting seeds with the hope they'll grow into something more valuable over time. Imagine you have some money, and instead of keeping it idle, you decide to use it to buy things that have the potential to increase in value. These things can be like seeds – they can be pieces of companies (stocks), loans you give to companies or the government (bonds), or even owning a piece of land, gold, or silver.

The goal is for these "seeds" to grow, either by providing you with more money (income) or by becoming more valuable over time (appreciation). It's a way of making your money work for you, hopefully helping you achieve your financial goals in the long run.

Why do we need to make investments?

The imperative of engaging in investments in the current landscape is underscored by various factors, each playing a pivotal role in comprehensive financial planning:

Extended Life Expectancy:

• As life expectancy continues to rise while retirement ages remain relatively stagnant, strategic planning for post-retirement life becomes essential. Relying solely on accumulated savings proves inadequate, necessitating judicious investments to cultivate substantial wealth for the retirement phase.

Taxation Optimization:

• Investments provide a strategic avenue for minimizing tax liabilities. Various investment instruments offer opportunities to optimize tax levels, contributing to overall financial efficiency.

Interest Rate Dynamics:

• Diverse investments present distinct interest rates, demanding a comprehensive evaluation. While a higher interest rate is enticing, its attractiveness diminishes without a nuanced consideration of risk. The stability of interest accrual is as crucial as the interest rate itself.

Inflation Safeguard:

• Inflation, leading to escalating prices, poses a formidable threat to our standard of living. Failing to address this challenge results in the erosion of savings over time. Investments play a crucial role in counterbalancing the erosive impact of inflation, generating supplementary interest/income.

Augmented Income Streams:

• Aspirations for additional income beyond regular earnings drive individuals. Investments serve as a conduit for realizing this objective, presenting opportunities for augmenting overall income.

In summary, investments emerge as an indispensable strategy for securing financial stability, addressing long-term goals, and navigating the complexities of contemporary economic dynamics.

What are the types of financial assets for investing?

Diversifying one's investment portfolio involves a judicious selection of financial assets. The spectrum of financial instruments available for investment is extensive, encompassing a range of options tailored to different risk appetites and investment objectives. Some prominent types of financial assets for investing include:

Stocks:

• Equities represent ownership in a company and offer the potential for capital appreciation and dividends.

Mutual Funds:

• Pooled funds managed by professionals, investing in a diversified portfolio of stocks, bonds, or other securities.

Bank Deposits:

• A low-risk option involving placing funds in a bank, typically offering fixed or variable interest rates.

Annuities:

• Insurance products providing a stream of payments, often used for retirement income planning.

Bonds:

• Fixed-income securities representing debt issued by governments, municipalities, or corporations, offering periodic interest payments and return of principal.

Commodities:

• Physical goods such as gold, silver, oil, or agricultural products, providing diversification and a hedge against inflation.

Currencies:

• The foreign exchange market allows for the trading of different currencies, offering opportunities for speculation and hedging.

Real Estate Investment Trusts (REITs):

• Investment vehicles that own, operate, or finance income-generating real estate, providing a means to invest in real estate without direct ownership.

Digital Gold:

• Cryptocurrencies, particularly those designed to mimic the properties of gold, providing a decentralized and digital store of value.

Exchange-Traded Funds (ETFs):

• Investment funds traded on stock exchanges, tracking an index, commodity, bonds, or a basket of assets, providing diversification and liquidity.

Each type of financial asset carries its own set of risks and potential returns, and constructing a well-balanced portfolio often involves a thoughtful combination of these assets based on an investor's financial goals, risk tolerance, and time horizon.

Is it appropriate to assert that investments are inherently without risk, and how does the level of risk assumed correspond to the ensuing returns in the context of investment strategies?

Analyzing every investment becomes imperative due to the inherent risk associated with each. This risk, however, varies across different investment avenues. Investors are presented with a multitude of options, allowing them to align their investment choices with their risk tolerance. 

A clear relationship exists between the returns and risk associated with invested assets. Typically, assets offering higher returns tend to be accompanied by a higher level of risk. The overarching objective remains to maximize returns while minimizing associated risks. The challenge lies in achieving a delicate balance between returns and risk.

The investment in Stocks is considered for this particular study. Both short term and long term investing philosophy are being analysed.

Short Term Investments and Long Term Investments can be compared to cricket like One Day cricket and Test Cricket. Both forms of the game involve bat & ball but the skill sets required are bit different in each format. Similarly short term & long term involve investing in stocks but the analysis and the skills differ. 

What are Short Term Investments?

In stock market an investor should always have a time period for their proposed investment. Usually it will vary from person to person. It could range from few days to many years to an extent of even 15-20 years. The investments that have a time period of less than 12 months are usually categorised as Short Term Investments.

What are the important tools used for short term investment?

Now the short term investments require a lot of analysis to choose the right stock. The indicators/parameters are different when compared to an investment which is for longer time period. Usually the study of these indicators is done through Technical Analysis. There are many technical indicators and its humanly impossible to study and use all of them. Also, many of them are similar in nature and hence its simultaneous use should be preferably avoided. Finally, none of these technical indicators can assure 100% accuracy but mainly using these indicators increase the success rate of your investment. So usually few indicators are used together to generate the signal for entering and exiting the market.

What are the technical indicators that are being used in this study?

The indicators that have been used here are 30 Days Moving Average, Relative Strength Index(RSI) and Moving Average Convergence Divergence(MACD). The moving average is used as the primary indicator and RSI & MACD is used secondary indicator to reduce the wrong signals. Based on the signals given by these indicators the investment decision to buy and sell stocks have been made in this study. Usually these indicators gives best results in a clear trending market.

What are Long Term Investments?

The investments which are made with a long term view preferably more than 3-5 years are categorised as Long Term Investments while Short Term Investments are usually for less than a year. The short term price movements impacts are very less when compared to a short term investment. The future growth and sustainability of the company is given priority while investing for long term. Long term investing is one of the best ways of creating the wealth. Following parameters need to be looked into while performing the Fundamental analysis of a stock:-

1. Management of the Company

2. Business Model

3. Competitive Strength (Peer Comparison)

4. Financials of the Company

5. Historical Performance of the Company

6. Key Ratio Analysis

7. Market Capitalisation

To sum it up, the accuracy of the fundamental analysis depends on how efficiently we are able to understand its basic financial statements along with the assessment of its business with respect to the industry in which it operates.

What are the important things to be considered for long term investing?

Fundamental analysis is tool that we use for long term investing. It is a holistic study of the business. From a long term perspective it is very crucial for the investor to understand the business model of the company. The priority should be given to the performance of the business. Over a period of time, as the company grows owing to its excellent business performance the value of the stock will also appreciate considerably thereby creating wealth.

Why perform Fundamental Analysis for long term investing when you have Technical Analysis?

Technical analysis help you reap quick profits. It is a tool which guides you in timing the market. The entry price and time of purchase are signalled though technical analysis. Now for a long term investor these parameters are not the most important things. The nature of business, its growth rate and the future of the business is what it matters to them. Will the company exist after 10 years? Will it grow or will it be at the same level? These are some of the questions which a long investor would seek answer for. Unfortunately technical analysis wont be able to provide much insight about these things. Hence we use fundamental analysis which actually gauges the basic fundamentals of the company. 

When we build a building the foundation is very important. To expand(grow) the building we always look if the foundation is strong enough to withstand it. Similarly in an industry only a company with strong fundamentals will be able to grow sustainably and also be able to withstand the competition from its peers. Fundamental analysis gives you that assessment and hence very valuable for a long term investor.

How do we start long term investment? Also, what should be the frequency?

There are two ways to go about investing for long term. Firstly if you already have a huge capital as savings then you could invest in stock as a lumpsum investment. It is important to invest in multiple stocks across different sectors. As you may know putting all the eggs in a single basket is risky, similarly even in stock market it is risky to invest the whole capital in just one stock. Every sectors may face challenges at some point of time and diversification is a key element to mitigate risk. So in an ideal portfolio one can invest 8-10 stocks across 4-5 sectors. While investing a lumpsum important the valuation of the company may be done too to ascertain if it is very highly overvalued, this can maximise your profits. Generally good stocks tend to be at a premium for most times thereby reducing the opportunities to buy them below their intrinsic value. Second method is to adopt a Systematic Equity Purchase (SEP) plan. It involves buying various stocks in small quantities at a frequent interval like monthly or quarterly. Historically when we compare the returns given by both methods, for duration of 5-6 years or less SEP Mode of investing has higher consistent returns. But as the time period of investment increases beyond 6 years lumpsum investment tends to give marginally higher returns when compared to SEP. Wealth creation will happen in both cases. One very important factor to remember is that Fundamental Analysis is not a one time exercise. This process has to be repeated quarterly or worse case at least half yearly to monitor the position of the company. The continuous investment will continue only if the fundamentals are still strong and there aren't any imminent threats.

In our study, we have adopted SEP mode of investing as you do not need large capital to start with. Also this form of investment is ideal for investors with fixed income.