Investment guide - Back to Basics

Investment guide - Back to Basics

A famous quote from Bill Gates states that “If you are born poor then it is not your mistake, but if you die poor then definitely it is your mistake”.

To make you understand this, we would consider a popular book Rich Dad and Poor Dad, which make you understand the principle of investing.

Robert Kiyosaki, in his book, talks about his two fathers. His real father was poor while his best friend’s father was rich, and he discussed the thought process of both dads, which helped him to shape his thoughts about money & investment.

In his book, he says that it is not necessary that you earn a high income to become rich. Instead, rich individuals make money work for them as they generate income from the assets in which they invested. An important lesson one can learn from this book is that the most powerful asset which an individual possesses is his mind. 

Robert Kiyosaki talks about assets & liabilities. According to him, assets put money into your wallet while liabilities take money out of your wallet. Cash flows tell about the money management skills of the person.

One should remember that money comes and goes but the right education about how the money works help in gaining power over it and helps in building wealth.

As per Robert Kiyosaki, one should focus on income-generating assets after having an understanding of the difference between assets and liabilities.

Let’s look at the difference between the Rich and the Poor.

Rich class people

Poor and Middle Class people

 

 

Buys Assets

Expenses are more.

Focus on the asset column

Focus on the income statement

Are not financially conservative.

They are financially conservative.

Manages risk

Not ready to take risk

Make efforts to learn how money works.

Focus to get good education and get safe & secure job

 

 

 

Some of the basic asset classes for investors are:

  • Equities:

Purchasing an equity means owning a stake in a particular company.

  • Fixed Income:

This is a debt instrument. These include bonds, debentures or certificate of deposits.

  • Real Estate:

Real estate refers to the ownership of any physical property like land, house etc.

  • Commodities and Precious Metals:

In case of investment in commodities and precious metals, you do not own any gold or commodity but you can trade them.

  • Cash:

An example of this could be your saving account or your fixed deposits that help in generating income.

Amongst various types of investment, the most popular amongst the investor is stock trading and it is the most common way to have an investment experience.

But before one start investing in the stock market, it is very important to know yourself. By this, we mean the kind of investor you are. When you would open a brokerage account, you would be asked to provide data such as investment goals and your risk appetite.

There is always an option that whether you want to handle your investment by your own or you want a brokerage firm to do that for you.

If you are someone who wants to invest by yourself, then follow these five simple steps:

  • Start investing at an early age. This will enable you to see strong result on your money and you can witness compounding effect.
  • Determine the amount you want to invest. It is decided based on the investment goals and the tenure in which you want to attain your goal.
  • Next step towards stock investment is the opening of an investment account.
  • Understand your investment options. It means the asset classes in which you want to invest your money.
  • Select an investment strategy. You should change your investment strategy according to the market scenario.

Things you should know before investing in a stock:

  • Do a homework on the stock before buying them. For this, you need to understand the financial statements of the company like income statement, cash flow statement and balance sheet.
  • Understand the trends of the company’s earnings growth. With time, if the company’s earnings are in the upward direction, then it is an indication that it is doing well.
  • Try to understand the relative strength of the industry. One should also look at the industry in which the company operates. Industry could be considered as a good screener when you take any investment decision. If the industry has future potential and there are some growth catalysts, there is high probability that the company might perform well in future periods.
  • Check the Debt/Equity ratio of the company in order to have a broader understanding of its financial footing. If the company has more debt, then it can be said that your investment is at risk. Generally, investors opt for the companies with lower debt.
  • Price to Earnings ratio or P/E ratio: This ratio is calculated by dividing current market price of the share by earnings per share (or EPS). It is used by investors to identify whether the stock is overvalued or undervalued. The financial analysts take into account forward and trailing P/E before recommending any investment decision.
  • Know about the company’s management. If the company is backed by strong and experienced management team, your investment could result in generating higher profits.
  • Look for the dividend paying companies as, generally, these are the ones with decent fundamentals and can withstand short-term headwinds.

Following are some of the golden rules of investing:

  • If you take more risk, you will be getting more return.
  • Try to diversify your portfolio. This would provide lower-risk exposure
  • Examine your portfolio regularly and track the news related to the stocks in your portfolio.
  • It is important to stay calm when market is volatile. Fluctuations can influence your portfolio and, in such a situation, you should not panic.

A good Read: Things to Learn from Past Crises: Role of Financial Planners During Times of Crisis

           Trading and Investing - According to Jim Simons and Warren Buffett

   
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