Contents
Meaning of Fundamentals of Investment
Investment refers to buying assets or acquiring some ownership of any company at a low rate to yield a profit when it grows to a value of a high rate.
The term equity refers to ownership.
Share refers to a part of the company which a person owns. Thus, he is regarded as a shareholder of the company.
A group of shares is called stock. So, when a person owns numerous units(or shares) of a company, he is said to own stocks of the company. Investment in assets helps you create as well as preserve wealth over a period of time. An investment in a good asset has the potential to yield heavy returns in the future.
Although, there are market risks associated with investment where the principal capital tends to rise and fall with volatility in the market and due to demand & supply momentum, over the long term, these seem like ladders constructing a business cycle of boom and slump.
How do Investment Fundamentals Work in Alignment?
Planning
Defining your financial goals, ascertaining your desired rewards, and simultaneously specifying your risk-bearing capacity are some of the key components in planning your investment wisely. Financial discipline is the by-product of planning as, without the discipline, Planning goes in vain.
Asset Allocation
You also need to define the time frame for which you want to park your funds.
Generally, there are 3-time frames :
- Short term < 1 year
- Medium-term – 1 to 5 years
- Long term > 5 years
For those looking for periodic income from investment go for short-term securities.
Those looking for accomplishing short-term goals like course funding or trips choose the medium term and those looking forward to long-term desire accomplishments like owning a car or marriage invest in long-term securities.
Power Of Compounding
The best benefit of investment is the reinvestment benefit.
Those who earn capital gains or dividends, if choose to reinvest the same back into their capital, gain a return on return. This leads to exponential compounding of capital thus, creating multiple returns for an investor.
Fundamental of Investing: Principles
A millionaire develops propelling net worth only by virtue of his principles.
Thus, the investment horizon of every investor must be backed by self-developed principles of investment which become the standard for fruitful investing.
Below are a few basic principles of fundamental investing for effective returns:
Create realistic and psychic-friendly goals
The term “realistic” refers to achievable and feasible goals which can be measured. Also, the amount of investment should be pocket friendly i.e the person should own an amount equivalent to the minimum requirements that the securities demand. It is always advisable to invest self-earned income and to never rely upon or borrow funds for investing as investments are subject to market risks.
The term “psychic-friendly” means the investment should give peace of mind than hassle and restlessness. It should not own risk beyond the bearing capacity of the investor. The investor should also not believe in the noise created in the market. There are many deterring factors in the market giving tips, ideas, and strategies to make early money which often dumps a person into bankruptcy because of the greed associated with creating quick bucks!
Carry Safety Margin
Buy at low, sell at high.
Often referred saying in investment markets, one should buy securities when the market is at an all-time low valuation and sell when the price of securities shoots up. This helps a person create a huge capital gain.
However, it is important to carry a margin of the fund to cover the investment-related risk which may occur if the price of securities falls further down.
Invest for Long Term
Short-term investment is for creating income whereas, long-term investment is for creating wealth!
Wealth building is a long-term process and this involves reviewing your portfolio periodically, rebalancing it with fixed-income securities to hedge the risk, and viz-a-viz holding growth securities as an element of calculative risk.
Define Your Risk
It is significant for every investor to develop their fundamentals for investment based on which they buy the securities.
For example, Alex owns capital worth $1,00,000 with 60% debt and 40% equity. His risk-o-meter lies between medium to high risk i.e, he can buy those securities which give him medium to high returns.
Thus, even if he is unable to meet financial goals for a particular month, he should not trade in options to fulfill the deviations in his expected returns as it is beyond his risk capacity.
Fundamentals of Investing: Rules
Rules are parallel to principles.
Where principles define the map to healthy investment, rules are the roads for steps in investment.
Some potentially prominent rules for fundamental investing are as follows :
Invest in Business you understand
Investing in a vague market does not yield investors any financial wisdom. Every investor needs to know about the business, operations, growth, and profitability of the company he is looking forward to joining hands with. It is also important for an investor to see whether the company is dividend-yielding or profit retention oriented as the ultimate goal of every investor is to maximize his gains.
Don’t Time The Market
The investment market is multi-faceted as it swings up & down and is volatile. In short term, it makes erratic moves and is dependent on external or market factors
but over the long term, these short-term hurdles appear as ladders to growth.
Thus, it is advisable to define your time frame and make safe entry & exit for your investment securities.
Don’t Follow The Crowd
Maximum people in the market, especially the share market, can not earn a profit because they have no personal research or self-evaluated strategies. They follow tips and social media channels to engage in “quick income” jobs.
Lack of personal financial planning dumps the portfolio returns which is the reason why many people fear investments.
Thus, it is important to make rational investment decisions and know where, how, and when to invest.
Fundamentals of Investment: Instruments
Multiple instruments are a part of fundamental investing. Financial literacy and discipline is the qualitative aspect of investment whereas adequate knowledge of investment instruments is quantitative acumen.
Basic financial instruments are:
Stocks
As discussed earlier, stocks are the unit owners of any company. A person can invest in stock to gain dividend income, capital gains, or for wealth creation by re-investment.
Also, stocks can be purchased in the short, medium, and long term.
People who buy and sell stocks within a day are called intraday traders and this is done to fulfill very short-term financial commitments.
People who trade for a week to month are called swing or positional traders and people who buy stocks for years are called investors. They withstand all types of shoots and slides in the market.
Bonds
Bonds are fixed-income debt instruments issued by the government and corporate bodies. Government Bonds are considered safer than corporate bonds as they hold the least risk. This is because the government can distribute returns by way of revenue from taxes.
In corporate bonds, there is a risk of default and credit risk but it comes with better returns than G-sec bonds.
Real Estate
Real estates are land and properties which provide gains in terms of rental income or land appreciation.
Mutual Funds
Mutual funds are a basket of investments that evolves financial discipline in investors because of its linkage with the bank and auto-debit system and is a slow route to wealth creation. The investor can re-invest, withdraw, top-up, change and switch their SIP plans anytime.