Investing looks deceptively simple but in fact is quite difficult. It involves using principles of behavioral finance alongside of the core concept of investing. However, the retail investors do not know the nuances and jump headlong into it with just one notion: Buy low and Sell higher. Though the concept of is true but there is more to investing which must be understood.
After the first lockdown in March 2020, a significant percentage of young Indian population entered the stock market. Confined to their homes, retail investors joined the market to make quick money egged on by the Youtube Gurus and social media influencers. A huge tribe of Gurus has emerged on Youtube and social media offering training in every conceivable business activity. The novice investors or traders have got their investing know-how from the Youtube.
Most Important Investing Principle Never to be Forgotten
It should never be forgotten that stock market is uncertain. If somebody says something contrary to this fact is not stating the obvious truth. So if the market is uncertain how come so many people make money and become rich. Yes, that is true many investors have made successful careers in the market. They have been able to do because they have understood and embraced the uncertainty of the market and evolved and developed their tools to safeguard and benefit from it.
The first principle that every investor has to obey is to protect his capital and then earn decent returns. It is the most important principle that every novice investor must abide by in order to stay afloat in the market. It is also important for the investors to learn about basics of fundamental analysis and valuation of stocks and companies.
Value investing involves buying stocks which are undervalued than their intrinsic prices. Appealing as it sounds value investing demands rigor and hard work and has been popularized by Warren Buffet who learned it from his mentor Benjamin Graham at the University of Colombia. However, the question is how you determine the intrinsic value of a stock.
Important Market Theories
There are two important market theories that you must know (1) Efficient market theory(2) Random walk theory and Modern portfolio theory(MPT).
Efficient Market Theory
Talking of the efficient market theory, it states that new information is discounted in the price so it is not possible to beat the markets. There is no denying the fact that markets discount everything sooner than later. But the theory assumes market participant behaves rationally which is not true. As long as humans operate in the market there are going to be inefficiencies which result in scenarios such as euphoria in the bull markets or gloom in the bear markets.
Random Walk Theory
Random walk Theory states that prices of stocks move randomly and cannot be predicted. It is predicated on the fact that there is no discernible trend in the market and randomly driven. Proponents of the theory are of the opinion that it is not possible to outperform the market. The theory considers technical analysis unreliable as the technicians enter the market only after a trend has emerged. Even fundamental analysis is not reliable as the information provided in the balance sheet might not be correct and can yield misleading information. Notwithstanding, the critics maintain that price trends do occur in the market and one can beat the market both in the short and long run.
Modern Portfolio Theory (MPT)
Modern portfolio theory was propounded by economist Harry Markowitz in the 1950s which posits that it is possible to constitute a portfolio delivering maximum returns taking optimum level of risk. The theory emphasizes the importance of risk, diversification, portfolios and understanding relationships underlying different securities and assets. Of course, it advocates not putting all your eggs in one basket.
Disclaimer: The views and investment tips expressed here are for educational purposes only and should not be considered as a call for investment. Bussinessfab.com advises users to consult a certified investment advisor before taking any investment decision.