Investing in the stock markets   Oct 19, 2005

Stock markets have always been a draw for investors for their ability to generate wealth over the long-term. Many have been at it, but few can claim to have mastered the art of investing in stocks. In most cases, investors have just not been able to appreciate the higher risks associated with stocks. Fear, greed and a short-term investment approach act as hurdles that frustrate the investor from achieving his/her investment goals. It's not very different when it comes to women investing directly in the stock markets. We have outlined some points that women need to keep in mind while investing in the markets.

To begin with, women have to appreciate the risks associated with stocks. Simply put, investing in stocks gives rise to dual risks  stock-specific risks and sector-specific risks (other than risks associated with the country as a whole). An example will help understand this better. When you decide to invest in a company like Hindustan Lever for instance, you are taking a risk with the company (management, competitive strengths, ability to counter competition). You are also taking a risk with the consumer products industry (fall in profitability, changing demographics, higher taxes, rising imports) in which Hindustan Lever is operating.

Of course there is a way to counter these risks; diversifying your equity portfolio to include more stocks and sectors is one way. This helps you diversify your investment risk, so even if something were to go wrong with a stock/industry in your portfolio, other stocks/industries should help you shore up your portfolio.

If all this sounds too complicated and time-consuming, you can consider investing in mutual funds. Mutual funds have a team of investment professionals who do what we have explained in the earlier paragraph  diversify risks by investing across several companies and industries and tracking the same on a regular basis.

However, if you are more ambitious than that and appreciate the risk of investing directly in stock markets, then you should do so. The good news for you is that there are resources at your disposal that should help you make this a profitable decision. Two important resources that are critical to investing directly in stock markets are quality stock research and a reliable and inexpensive stock broker.

The first one  research on stocks  is the most critical input that investors need to identify before they begin investing in stock markets. This is because even while you may have the risk appetite for equities, you still need credible, stock-market-related research that can help you make the right investment decision. While short-listing the equity research inputs, you need to keep some points in mind.

  1. Avoid the stock market tips variety of information that masquerades as stock research. Tips are best left to punters. You, on the other hand, are an investor and nothing less than credible, analysis-backed research should make the grade for you.

  2. When we say that you must avoid the stock tips kind of research, we mean you must go with the kind of research that gives a long-term view on a stock. Equities are for the long-term (at least 3 years in our view) and the research that you look at must give you that feel. So avoid research that talks of technical analysis and charts and advances it as a reason for investing or not investing in a company. Instead look out for research that is backed by a strong fundamental analysis for investing or not investing in a company.

  3. Like with all other service vendors, you would like to see a track record with your research vendor. Check how your research provider's advice has fared over the years, especially during a downturn. Most research analysts get their advice right during a stock market rally (remember a rising tide lifts all boats!), so that's not really a good time to assess their credibility. It's during a stock market downturn that you get a chance to see if his advice really delivers.

  4. Cost of research is also important. Research can be expensive so it's important to evaluate the cost vis-à-vis the number of times you trade and quantum of trade. For instance, if you are the kind of investor who trades very infrequently or whose total trades are on the lower side, let's say in the region of Rs 25,000-Rs 50,000, then paying Rs 5,000 for a research service is not feasible.

  5. Today as the internet touches more households, you now have the option of subscribing to an online equity research website. This helps particularly if you are net savvy and/or tend to execute your stock trading online. Online equity research agencies also tend to update research reports a lot quicker than those that print their reports, because an online update consumes less time and resources as compared to an update in print format.

The other important service provider for you is the stockbroker; he is the one who helps you execute the transaction over the stock exchange. The stockbroker has an important role to play so you must be careful while selecting your broker. Some points that you need to keep in mind while evaluating a stockbroker.

  1. You should ideally get a reference for a stockbroker from your friends and relatives. If they have traded through the broker a good number of times and are satisfied with his services, then that serves as a good enough reference.

  2. If you have some idea about the stockbroker's past record it could help. The role of brokers in the stock market scams and their misconduct has always come under the scanner. So a clean reputation is a pre-requisite. Again informed friends/relatives may just be able to help you with that information.

  3. High brokerage fees/charges can be a turn-off, especially if you are the kind of investor who trades actively. However, a higher charge backed by high service standards would seem justified. High service levels would include prompt confirmation of trade by phone/mail/fax, prompt delivery of contract note, prompt delivery of cheque in a sales transaction. Regardless of the level of service standards, you need to compare the brokerage charges across a few stockbrokers to get an idea of what the competition has on offer.

  4. Unrelated to your stockbroker, but relevant to stock trading is the demat service. Since stocks are now increasingly traded in demat format, you need to have a demat account. If your stockbroker is a Depository Participant (DP), then you can open a demat account with him and integrate your stock-broking and demat services in one entity. This helps smooth the whole process of stock trading.

  5. If you have an internet connection at home, then an online broker should appeal to you. Homemakers in particular will find this option convenient. Online brokers are likely to have lower brokerage charges than offline brokers, because online brokerage is more cost-effective and brokers pass on this benefit to clients. Some banks that are online brokers offer a 3-in-1 package that includes the stock-broking service, demat account and a bank account (usually zero balance). Of course, there is an annual fee for the 3-in1 package; so if you trade very infrequently or only in small amounts, you may not find it very cost-effective and can choose an offline broker instead.

You would have noticed that today there are several options available to women with a risk appetite for investing directly in the stock markets. You have research on equities, you have online brokerages, and you have a lot more relevant information now that helps you take investment decisions more quickly and accurately.

In other words, the process of investing in the stock markets just got more efficient; however, the risks haven’t got any lower. So investing with a certain level of prudence is necessary, as always.

This article has been sourced from the July 2005 issue of Money Simplified – A guide to Financial Planning for women and children. To download the issue for free, click here.

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