A group of business students, (Iqra, Aqeel, Nabiha, Khuram, Abid and Bakht). This group has a sound knowledge of finance, economy and theoretical knowledge of investments. They have decided to contribute and invest jointly in the stock market. Total available funds are 0.6 million (Rs.600000). The objective of this innovative group is to learn the best way to invest and earn.
They are planning to open a joint account in a brokerage house. Could you describe how this group can invest and achieve their objectives?
Advise this innovative group, how should decide the selection of shares and other instruments what factors they should consider to select and value the shares and other investments.
Discuss all the factors, analysis and strategies.
There are two important factors while discussing the best way to invest in your 20s, in terms of finance and economics. The factors are time and money. Particularly, when it comes to the investment, every entrepreneur or an investor is only concerned about the output OR which is called ROI (Return on Investment) in business terminology.
Before going to invest, it is important to understand a few things, like Where to invest? How to invest? And when to invest? Does this group firstly identify that in which company they want to invest? Which company is useful for them where they can get a significant ROI?
So, this group has to evaluate these things if they want to earn some money through investment. They can open a demo account in the stock market to learn the processes of investment. The group has to focus on a few important factors before they start investing. Like earning growth of the company, Stability, relative strength in the industry, debt to equity ratio, price to earnings ratio, management, and Dividends of the company.
The group has to focus on price because Price is the number one factor to consider when you’re making an investment decision. It doesn’t matter if you’re buying a stock, bond, mutual fund, commodity, or real estate.” The price that you pay for investment will determine whether it is a winning or losing bet. The group should be aware that the Macro-economic factors such as interest rates, inflation, unemployment and economic growth often move stock markets.’ Stock markets are always rooting for more economic growth because it usually means more profits for companies, and more profits tend to grow the value of stocks.”
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The group should know that ”How to Pick Stocks” and they have to follow these ideas that:
- Understand your level of risk and decide what is appropriate.
- No Matter your personality, develop a smart strategy for choosing stocks to invest in.
- Start by picking one stock and then analyze the results.
- Use trading charts to understand the movement of stocks and the overall market.
- Finally, stick with your plan!
>” The group should aware upon 5 key characteristics of a good investor before investing:”
Goal setting. Failing to plan is planning to fail! A good investor will always have a clear goal.”
Knowledge: When you know better, you do better!”
Right Decision: Listen to the world but do what is right.”
Patience: Keep calm and carry on!”
Risk Aversion: Know thyself!”
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There are seven factors that are affecting in the stock exchange which are important to understand for learning the best way to invest in your 20s.
1: Economic growth
“Higher economic growth or better prospects for growth will help firms be more profitable because there will be more demand for goods and services.” This will help boost company dividends and therefore share prices.
2: Interests rates
“Lower interest rates can make shares more attractive for two reasons.” Lower interest rates help boost economic growth making firms more profitable. Also, lower interest rates make shares relatively more attractive than saving money in a bank or holding bonds.” If bond yields fall, it may encourage investors to switch into shares which give a relatively better dividend.”
3: Stability
Stock markets dislike shocks that could threaten economic stability and future growth.” Therefore, they will tend to fall on news of terrorist attacks or spikes in the price of oil.” They will also dislike political instability which may make it difficult to pursue strong economic policies.”
4 Confidence and expectations
A key factor is the mood of investors. If they receive economic news that gives optimism then they are more likely to buy shares.” If they receive bad news they will sell.” This is why in the depth of a recession, stock markets can start to rise.” Investors are always trying to predict the future. Therefore if they feel the worst is over the stock market can rally even when economic fundamentals remain poor.
5 Bandwagon effect
At times the stock market seems to over-react to certain events.” For example, in 1987, relatively little bad news caused the stock market to fall by 25%. Even today it remains a little mystery why the stock market fell so much there was no economic problem.” In fact, the stock market soon recovered it’s lost ground. Part of the issue is that people follow the mood.” When prices fall, people may feel the need to follow suit and get out of the market.”
6 Related markets
Often investors have choices. For example, rather than investing in the stock market, they could buy government bonds or commodities.” If investors feel government bonds are overpriced and likely to fall, then the stock market can benefit as people move into shares.”
7 Price to earnings ratios
Some investors and economists, such as Robert Shiller feel the best guide to the long-term performance of shares is their price to earnings ratios.” If share prices rise significantly above historical averages, then this is a sign that shares are becoming overvalued and are due to correction at some point in the future.
Investors depend on stock analysis to find potentially profitable stocks. Common ways to analyze stock include technical and fundamental analysis.” Several components fall under fundamental analysis, including examination of a company’s price-to-earnings ratio, earnings per share, book value and return on equity.” Many investors also use the recommendations of financial analysts to analyze a stock.” The type of stock analysis you implement is based on personal preference.” Understand the different ways to analyze a stock to find the method that best fits your financial objectives.”
Strategies for the best way to invest
Strategy 1: Value Investing
Value investors are bargain shoppers. They seek stocks they believe are undervalued.” They look for stocks with prices they believe don’t fully reflect the intrinsic value of the security.” Value investing is predicated, in part, on the idea that some degree of irrationality exists in the market.” This irrationality, in theory, presents opportunities to get a stock at a discounted price and make money from it.”
Strategy 2: Growth Investing
Rather than look for low-cost deals, growth investors want investments that offer strong upside potential when it comes to the future earnings of stocks.” It could be said that a growth investor is often looking for the “next big thing.” Growth investing, however, is not a reckless embrace of speculative investing.” Rather, it involves evaluating a stock’s current health as well as its potential to grow.”
Strategy 3: Momentum Investing
Momentum investors ride the wave. They believe winners keep winning and losers keep losing.” They look to buy stocks experiencing an uptrend. Because they believe losers continue to drop, they may choose to short-sell those securities.” But short-selling is an exceedingly risky practice. More on that later.”
Strategy 4: Dollar-Cost Averaging
Dollar-cost averaging (DCA) is the practice of making regular investments in the market over time and is not mutually exclusive to the other methods described above. Rather, it is a means of executing whatever strategy you chose.” With DCA, you may choose to put $300 in an investment account every month.” This disciplined approach becomes particularly powerful when you use automated features that invest for you.” It’s easy to commit to a plan when the process requires almost no oversight.”
The Author is Business Student at Quaid-e-Azam University, Islamabad
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