What is investing

Investing philosophy

  What is investing?
A: Investing lets your money earn some more money, thus getting it to work harder for you. In effect, your savings do not sit idle, but help you profit from them.
  Why should you invest?
A: There are two main reasons why you should invest:
To stay ahead of inflation
As the cost of living keeps increasing and day-to-day expenses keeps rising, investing lets you keep pace with these
changing market conditions.
To achieve financial goals As the saying goes A journey of a thousand miles, begins with a single step. Investing small amounts of money over a period of time brings you closer to your financial goals.
  When should you invest?
A: With investing, time makes money. Thus, the earlier you start investing the better, since you can reach your financial goals faster. So, regardless of your financial position, investing ensures that you accrue wealth over time.
  Where do I start if I have no savings?
A: The first step to investing begins with saving. You can stay invested, even by saving small portions of money on a monthly basis. Thus, the first successful investment decision, is the decision to start saving, however difficult it may seem at first. After all, where there is a will, you will always find a way!
For eg: If your monthly salary is Rs 20,000 per month and your monthly expenditure is Rs16,000 per month, park the difference of Rs 4,000 into an investment avenue of your choice immediately.
  What's the next step after my first investment?
A: Investing is a lifelong activity; you need to keep investing regularly. To keep track of your investments, make use of Portfolio Tracker.To know about investment opportunities, keep reading up about financial markets and companies. As you move to Chapter 2,you can gain a deeper understanding into this subject.
  How Do I Get to My Allocation Goal
A: Financial goals can be separated into two types:
Short-term goals - Are immediate goals,ones you would want to achieve now or within a year.For ex- Buying a computer,a bike,a mobile, music system, DVD player etc.Generally,it takes less money to reach these short-term goals.
Long-term goals - Take you a longer time to reach and need adequate investment planning, as they involve larger sums of money.
For ex. Buying a luxury car,buying a house,and even starting a business.
Often, it is the first step towards investment that seems to be the hardest.However, with adequate planning and a clear focus on the objectives, you could attain your goals with ease.You should always plan for your goals taking into consideration your risk-return appetite and accordingly apportion your funds into various channels.

Investment and Basic types of Investments

Investment refers to purchasing assets, keeping funds in a bank with an expectation of having a return which is beneficial. Understanding the core concepts of investments will help to maximize the portfolio of investment and its return, and it will also help to reduce the risk associated with the investment.
There are various types of investments which includes the following:-
1- Cash Investments are those investments which gives a low rate of interest than other investments. Investments rate of return is further lower in the period of inflation. These investments include depositing money in bank, saving accounts etc.
2- Stocks will make the purchaser the partial owner of the company and will entitle the purchaser to have a share in the company’s profit.
3- Mutual Fund is a combination of both the bonds and securities and it also includes an intermediary to select securities for an individual. In this type of investment one does not need to track with the investment.
4- Commodities are kind of investments in which industrial and agricultural products are traded. Commodity trading is associated with a high level of reward as well as with a high level of risk. In depth analysis is the basic requirement of commodity trading.
5- Real Estate is a type of long term investment which requires long term commitment of the capital which is invested. The return can be generated through rental income, appreciation in the value of real estate and lease in come.
Before Investing one should have a very clear idea of each type of investment and then he should select in which type he wants to invest keeping in mind his own financial position and his financial strength.

Investment Management

Steps of Investment Management Process 

Before investing, investment management should be done. Investment Management is a five step process. Following are the 5 steps of investment management:-
1- Setting the Investment Objectives:-
The first and the basic step for investment is that the investor should set his investment objectives. These investment objectives vary from person to person. For example for an individual the objective may be to optimize the rate of return.
2- Establishing Investment Policy:-
Establishing investment policy refers to the allocation of asset amongst the major allocated assets in the capital market. The range of allocated asset is from equities, debt, fixed income securities, real estate, foreign securities to currencies. Restraint of environment and that of investor should be kept in mind while establishing the investment policy.
3- Selecting the Portfolio Strategy:-
The portfolio strategy selected should be in accordance and in conformity with the investment objectives and investment policies. If these are not in accordance with each other then the whole investment management process will collapse.
4- Selecting the Assets:-
The assets to be placed in the portfolio have to be selected by the investor. This is the point where real creation of portfolio will take place after the selection of assets in which to invest by the manager or investor. That asset will be selected which will give best return in available resources and which involves lowest risk. The assets can be shares, stocks, art objects, securities, gold, property etc.
5- Measuring and Evaluating Performance:-
In this step the performance of the portfolio will be measured in comparison to the realistic benchmark or the standard set by the investor. Risk and return will be evaluated by the manager. Measuring and evaluating the portfolio will give the feedback to the investor and will in turn help the investor to improve the quality as well as the performance of the portfolio of investment.

Determining Risk And The Risk Pyramid

 You might be familiar with the risk-reward concept, which states that the higher the risk of a particular investment, the higher the possible return. But many investors do not understand how to determine the risk level their individual portfolios should bear. This article provides a general framework that any investor can use to assess his or her personal risk level and how this level relates to different investments.

Risk-Reward Concept
This is a general concept underlying anything by which a return can be expected. Anytime you invest money into something, there is a risk, whether large or small, that you might not get your money back. In turn, you expect a return, which compensates you for bearing this risk. In theory the higher the risk, the more you should receive for holding the investment, and the lower the risk, the less you should receive.

For investment securities, we can create a chart with the different types of securities and their associated risk/reward profiles.


Although this chart is by no means scientific, it provides a guideline that investors can use when picking different investments. Located on the upper portion of this chart are investments that have higher risks but might offer investors a higher potential for above-average returns. On the lower portion are much safer investments, but these investments have a lower potential for high returns.

Determining Your Risk Preference
With so many different types of investments to choose from, how does an investor determine how much risk he or she can handle? Every individual is different, and it's hard to create a steadfast model applicable to everyone, but here are two important things you should consider when deciding how much risk to take:

Time Horizon Before you make any investment, you should always determine the amount of time you have to keep your money invested. If you have $20,000 to invest today but need it in one year for a down payment on a new house, investing the money in higher-risk stocks is not the best strategy. The riskier an investment is, the greater its volatility or price fluctuations. So if your time horizon is relatively short, you may be forced to sell your securities at a significant loss. With a longer time horizon, investors have more time to recoup any possible losses and are therefore theoretically more tolerant of higher risks. For example, if that $20,000 is meant for a lakeside cottage that you are planning to buy in 10 years, you can invest the money into higher-risk stocks. Why? Because there is more time available to recover any losses and less likelihood of being forced to sell out of the position too early. Bankroll Determining the amount of money you can stand to lose is another important factor of figuring out your risk tolerance. This might not be the most optimistic method of investing; however, it is the most realistic. By investing only money that you can afford to lose or afford to have tied up for some period of time, you won't be pressured to sell off any investments because of panic or liquidity issues. The more money you have, the more risk you are able to take. Compare, for instance, a person who has a net worth of $50,000 to another person who has a net worth of $5 million. If both invest $25,000 of their net worth into securities, the person with the lower net worth will be more affected by a decline than the person with the higher net worth. Furthermore, if the investors face a liquidity issue and require cash immediately, the first investor will have to sell off the investment while the second investor can use his or her other funds.

Investment Risk Pyramid
After deciding how much risk is acceptable in your portfolio by acknowledging your time horizon and bankroll, you can use the risk pyramid approach for balancing your assets.


This pyramid can be thought of as an asset allocation tool that investors can use to diversify their portfolio investments according to the risk profile of each security. The pyramid, representing the investor's portfolio, has three distinct tiers:

Base of the Pyramid – The foundation of the pyramid represents the strongest portion, which supports everything above it. This area should consist of investments that are low in risk and have foreseeable returns. It is the largest area and comprises the bulk of your assets. Middle Portion – This area should be made up of medium-risk investments that offer a stable return while still allowing for capital appreciation. Although more risky than the assets creating the base, these investments should still be relatively safe. Summit – Reserved specifically for high-risk investments, this is the smallest area of the pyramid (portfolio) and should consist of money you can lose without any serious repercussions. Furthermore, money in the summit should be fairly disposable so that you don't have to sell prematurely in instances where there are capital losses.

The Bottom Line
Not all investors are created equally. While others prefer less risk, some investors prefer even more risk than others who have a larger net worth. This diversity leads to the beauty of the investment pyramid. Those who want more risk in their portfolios can increase the size of the summit by decreasing the other two sections, and those wanting less risk can increase the size of the base. The pyramid representing your portfolio should be customized to your risk preference.

It is important for investors to understand the idea of risk and how it applies to them. Making informed investment decisions entails not only researching individual securities but also understanding your own finances and risk profile. To get an estimate of the securities suitable for certain levels of risk tolerance and to maximize returns, investors should have an idea of how much time and money they have to invest and the returns they are seeking.
 

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Truth of Option Trade: 10 Ways to Move From Risk to Profits

Stock options are not lottery tickets, chips in a casino, or a path to easy street. They are tools for the transference of risk from one person to the other. When trading options you must understand where the risk lies in your specific option play and what  the odds are of you winning. The Black-Schooled option pricing model does an excellent job of pricing in known variables of time and volatility into options. Implied volatility does not predict direction of the movement it predicts the amount of movement. The edge lies in three places #1 following the chart and trading in the direction of the trend #2 managing your risk on every trade allowing your wins to be bigger than your losses in the long term, and #3 having the discipline to follow your trading plan. Option trading is no different than any other kind of trading, just more leverage and speed of percentage movement.

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1. The first question to ask in any option trade is how much of my capital could I lose in the worst case scenario not how much can I make.
2. Long options are tools that can be used to create asymmetric trades with a built in downside and unlimited upside.
3. Short options should only be sold when the probabilities are deeply in your favor that they will expire worthless, also a small hedge can pay for itself in the long run.
4. Understand that in long options you have to overcome the time priced into the premium to be profitable even if you are right on the direction of the move.
5. Long  weekly deep-in-the-money options can be used like stock with much less out lay of capital.
6. The reason that deeper in the money options have so little time and volatility priced in is because you are ensuring someones profits in that stock. That is where the risk is:intrinsic value, and that risk is on the buyer.
7. When you buy out-of-the-money options understand that you must be right about direction, time period of move, and amount of move to make money. Also understand this is already priced in.
8. When trading a high volatility event that price move will be priced into the option, after the event the option price will remove that volatility value and the option value will collapse. You can only make money through those events with options if the increase in intrinsic value increases enough to replace the Vega value that comes out.
9. Only trade in options with high volume so you do not lose a large amount of money on the bid/ask spread when entering and exiting trades.
10. When used correctly options can be tools for managing risk, used incorrectly they can blow up your account. I suggest never risking more than 1% of your trading capital on any one option trade.

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Manage Risk in the Stock Market

What is Risk Management? 

Risk management is the process of measuring, or assessing risk and then developing strategies to manage the risk while attempting to maximize returns. Typically involves utilizing a variety of trading techniques, models and financial analyses.

The potential return from any investment is generally depending to the amount of risk the investor is willing to assume.

Investors will not take on greater risks without the possibility of higher earnings. This is called the risk premium.
 

Common types of Risk 

There are two common risks that investors should notice them well:

Market Risk: The possibility that the value of financial markets rise or fall.

Inflation Risk: The risk that rising prices of goods and services over time, Inflation risk is also known as 'purchasing-power risk' and it is one of the most important factors for long-term investing.

You can't control the inflation risk, but with a good strategy you can manage and control the affect of market risk on your stocks.

A professional trader always tries to understand and control portfolio risk. Before entering into any trade, good traders first think about how much risk to take and how much risk exposure comes with a particular trade selection. Only then do they allow themselves to think about how much profit they stand to make.

Prudent investors always close their position and exposure if they determine that a portfolio carries too much risk.
 

Risk Management for a Trade 

1- Before you decide to trade consider to these fundamental principles:

2- Before you trade a stock, know how much you are willing to lose.

3- Check the stock to be sufficiently liquid, can you buy or sell promptly?

4- Determine the cut-loss level before trading.

5- Determine your profit target (take-profit-level).

6- Buy the stock only at an acceptable price level. Use a limit order when you buy a stock.

7- Immediately after the trade has been confirmed, enter the stop-loss-at- market order at your predetermined stop-loss level.

8- Take profit when the trade reaches your profit target.

For example: so many traders determine their cut-loss level 2% of their capital and they call it 2% rule. If you own 1000 shares of X at $100 with a $2 stop loss order in place, your risk is: $2 * 1000 = $2,000. So long as you have capital amounting to at least $100,000 on hand, you would not be considered to be in breach of this "rule".
 

Portfolio Risk Management 

Whit managing the risk of each trade your portfolio risk will be well under control and you manage your portfolio risk actively, but to control your portfolio risk management better notice to this points: 
1- Determine your overall cut-loss level. Usually your portfolio should not lose more than 10% of your capital. 
2- Diversify your investment in at least six or more different stocks. 
3- Know your overall risk tolerance before building up the portfolio. 
4- Act quickly when you see your risk limits exceeded. 
5- Close out the entire portfolio if it loses to your overall stop-loss level. 

12 Basic Stock Investing Rules Every Successful Investor Should Follow

There are many important things you need to know to trade and invest successfully in the stock market or any other market. 12 of the most important things that I can share with you based on many years of trading experience are enumerated below.

1. Buy low-sell high. As simple as this concept appears to be, the vast majority of investors do the exact opposite. Your ability to consistently buy low and sell high, will determine the success, or failure, of your investments. Your rate of return is determined 100% by when you enter the stock market.

2. The stock market is always right and price is the only reality in trading. If you want to make money in any market, you need to mirror what the market is doing. If the market is going down and you are long, the market is right and you are wrong. If the stock market is going up and you are short, the market is right and you are wrong.

Other things being equal, the longer you stay right with the stock market, the more money you will make. The longer you stay wrong with the stock market, the more money you will lose.

3. Every market or stock that goes up will go down and most markets or stocks that have gone down, will go up. The more extreme the move up or down, the more extreme the movement in the opposite direction once the trend changes. This is also known as "the trend always changes rule."

4. If you are looking for "reasons" that stocks or markets make large directional moves, you will probably never know for certain. Since we are dealing with perception of markets-not necessarily reality, you are wasting your time looking for the many reasons markets move.

A huge mistake most investors make is assuming that stock markets are rational or that they are capable of ascertaining why markets do anything. To make a profit trading, it is only necessary to know that markets are moving - not why they are moving. Stock market winners only care about direction and duration, while market losers are obsessed with the whys.

5. Stock markets generally move in advance of news or supportive fundamentals - sometimes months in advance. If you wait to invest until it is totally clear to you why a stock or a market is moving, you have to assume that others have done the same thing and you may be too late.

You need to get positioned before the largest directional trend move takes place. The market reaction to good or bad news in a bull market will be positive more often than not. The market reaction to good or bad news in a bear market will be negative more often than not.

6. The trend is your friend. Since the trend is the basis of all profit, we need long term trends to make sizable money. The key is to know when to get aboard a trend and stick with it for a long period of time to maximize profits. Contrary to the short term perspective of most investors today, all the big money is made by catching large market moves - not by day trading or short term stock investing.

7. You must let your profits run and cut your losses quickly if you are to have any chance of being successful. Trading discipline is not a sufficient condition to make money in the markets, but it is a necessary condition. If you do not practice highly disciplined trading, you will not make money over the long term. This is a stock trading “system” in itself.

8. The Efficient Market Hypothesis is fallacious and is actually a derivative of the perfect competition model of capitalism. The Efficient Market Hypothesis at root shares many of the same false premises as the perfect competition paradigm as described by a well known economist.

The perfect competition model is not based on anything that exists on this earth. Consistently profitable professional traders simply have better information - and they act on it. Most non-professionals trade strictly on emotion, and lose much more money than they earn.

The combination of superior information for some investors and the usual panic as losses mount caused by buying high and selling low for others, creates inefficient markets.

9. Traditional technical and fundamental analysis alone may not enable you to consistently make money in the markets. Successful market timing is possible but not with the tools of analysis that most people employ.

If you eliminate optimization, data mining, subjectivity, and other such statistical tricks and data manipulation, most trading ideas are losers.

10. Never trust the advice and/or ideas of trading software vendors, stock trading system sellers, market commentators, financial analysts, brokers, newsletter publishers, trading authors, etc., unless they trade their own money and have traded successfully for years.

Note those that have traded successfully over very long periods of time are very few in number. Keep in mind that Wall Street and other financial firms make money by selling you something - not instilling wisdom in you. You should make your own trading decisions based on a rational analysis of all the facts.

11. The worst thing an investor can do is take a large loss on their position or portfolio. Market timing can help avert this much too common experience.

You can avoid making that huge mistake by avoiding buying things when they are high. It should be obvious that you should only buy when stocks are low and only sell when stocks are high.

Since your starting point is critical in determining your total return, if you buy low, your long term investment results are irrefutably better than someone that bought high.

12. The most successful investing methods should take most individuals no more than four or five hours per week and, for the majority of us, only one or two hours per week with little to no stress involved.

8 Ways to Reduce Stock Market Stress

=Do not watch Bloomberg, CNN, CNBC, or any stock news channel for a lengthy time. All the news will disrupt your rythm. Remember that the stock market is all about demand and supply, simply put. You do not need to listen to all those reporters, who themselves, I bet, are not even investors or traders. Being informed is good but being too paranoid with news data is not needed.

=Do listen only to yourself. There will be a lot of rumors in the grapevine regarding inside information on certain stocks. Take these with a grain of salt. In fact, treat these as humor only. You are the only one who controls your investments so you should do your own homework. You will be responsible for all the sound decisions you make so you have prepare yourself very well and not follow rumors floating.

=Get enough sleep every night. Sleeping 6 - 8 hours a night would give you a big advantage on how you respond and react to market changes during the day compared to sleeping less than 5 hours a day. Having a good night's rest allows you to be fresh and gives you a sharp mind to face not only the market challenges but everyday life as well.

=Have a plan. Have an investment methodology that caters to your emotional, spiritual and risk appetite. Develop a methodology that works for you. Investing and trading according to your working methodically will help you generate wealth and minimize your losses, thus reducing prolonged stress. Many people get stuck with bad stocks because they are confident with themselves, do not let this happen to you.

=Eat healthy foods. Trading makes use a lot of mental energy and puts stress on your body. Keep your body well balanced with what you eat. I always eat fresh fruits everyday usually apple, orange, or kiwi. Try not to make a habit of eating junk foods and replace it with healthy alternatives like fruits or oat crackers. Why not even make your favorite fresh fruit juice/shake while the market is open, it gives you a break from the mental concentration and allows your brain to soothe itself.

=Surround yourself with optimistic individuals. Being with people who are stressed and/or negative vibes would just give you more stress to deal with. Instead, talk to your trader/investor friends who are optimistic and give sound advice where you can even learn with.

=Learn to accept your losses. No trader can win all the time in the stock market. If you can maximize your profits and minimize greatly your losses then you will find yourself generating wealth in no time. One of the hardest to learn and one of the biggest stress inducing aspect are the losses from the stock market. Set on your methodology an acceptable loss percentage rate and follow it. I set mine at 5%. Whenever I already lost 5% in a stock that I bought, I immediately accept the loss and sell it. Protecting capital should be the priority. In the stock market, you should accept humility in what you do as the price is king and you are just following it.

=Do not jump the gun. Stop, think, then act. Three simple things you should remember to avoid stock market stress in the first place. Before you do anything, stop what your instinct and emotions are telling you. Think about the situation on the possible risks and rewards you are entering into. Then act upon your best judgment what you have to do in order to minimize loss and maximize gain.

GOLDEN RULES FOR TRADING

Divide your Risk Capital in 10 Equal Parts.

As part of the Successful money management, it is always advised to divide your Risk Capital (which you can afford to lose) into 10 equal Parts and at any given time none of your Single Trade should have more than 3 parts of your capital in it even if you are in a winning position. At the same time always keep some spare money for any Buying Opportunity, which may come any time.
 

Trade ONLY in active & high Volume Stocks/ Futures.

Many Traders get stuck with stocks for want of liquidity. Always rely upon Stocks which have reasonably high volume over a period of time. High Volume are always advised for easy Entry, Exit and Stop Loss. In low volume stocks the spread is too high and chance of Stop Loss limit getting failed is too high as there would be no Buyer or seller at your Stop Loss Level.
 

Come Prepared with a Trading Plan

Successful traders always keep their Trading Plans ready before entering into any transactions. One must prepare a Watch List or Probable candidates for Day's trading and remain focused on the movement of those stocks only. For example a Stock 'X' is on verge of a Bullish Breakout from any pattern or stock 'Y' has declined substantially after an initial sharp upmove or stock 'Z' is close to an important support level. Successful trader would concentrate on the movement of those stocks only and enter the trade as soon as stock 'X' gives the anticipated breakout or stock 'Y' starts an upmove or stock 'Z' breaks the support level to initiate a trade for quick gains.
 

Never Over Trade

This is the most common mistake committed by Traders, particularly after a Streak of winning Trades. This mistake Generally not only wipes off all the profits, but puts traders in heavy losses. In order to remain in market while making consistent Profits, under no circumstances, traders should go beyond their Risk Capital.
 

Trade in 2 to 4 Stocks at a time with strict Stop Loss.

In a Bull move, most of the stocks move up and similarly in any Bear Move, most of the stock moves southwards. As a Trader you know this fact but can you Buy 20 Stocks and try to make profit in all the 20 stocks just because all are moving up or vice versa in a Down trend? What will happen if market reverses without any indication on any bad news? Would you be able to monitor all your trades in such situation? Smart and Successful trader would trade in 2 to 4 stocks with strict Stop Loss and keep a strict vigil to avoid any misfortune in case of any eventuality.
 

Sell Short as often as you go Long.

More than 90% of common investors/ Traders are 'Bulls' by nature. Because they love to see prices going up only. Stocks are bought by anybody/ corporate/ financial institutions/ Mutual Funds to make profit on rise. They have large holdings and mentally they wish and pray for the market to rise only. But facts are different. History shows that Bull Phases have shorter duration that Bear phases. So every stock that moves up will retrace back to 38%-50%-66%. Since 90% investors are Bulls by heart they normally do not book profit at higher levels to re-enter later at lower levels instead they prefer to increase their portfolio at lower levels. Successful Traders know how to capitalize such correction. They are always prepared to go 'Short' as often as they trade on 'Long' side.
 

Don't Trade if you are not Clear.

Many Traders, because of their daily habits trade even when there are no signals to buy or short. Normally such situation arrives after a sharp rise or decline when stocks are adjusting their values. While some stocks attempt to move up, few may be taking breather before next move. Such situation are often confusing. There is no harm in taking rest for a day or two or short period if the trend is choppy, unclear or doubtful, instead of putting your money at higher risk.
 

Don't expect Profit on Every Trade.

If you consider you are a smart trader who can make profit on every trade, you are 100% wrong. Always be flexible and accept the fact as soon as you realize that you are on wrong side of the trade. Simply get out of the trade without changing your strategy during the market; it may cause you double losses.
 

Withdraw portion of your profits.

The business of Trading is excellent as long as you are making profits. Unlike other business your losses can be unlimited and rapid if market does not move as per your expectations. While in other businesses you may have other remedial measures available but in trading it is you only who has to control it. Traders have large egos particularly after series of successful trades and their tendency to enlarge commitments in overconfidence may cause major financial set back. There fore it is must that trader must take a portion of the profit and put it in separate account. This is absolutely must for long term stability in the market.

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