Investing in stocks - 4 Golden tips

It's that time of the year when both investors and the media pop the same question to market experts: "Where do you see the market headed next year?

Rather than making any prediction, we highlight some mistakes made by investors over the past year, and importantly, in the hope that they will be forearmed against committing such errors in future.

Exhibiting "representative bias"

Investors get overly impressed with the performance of certain sectors and blindly purchase their stocks, believing these to be good representations, irrespective of the prevailing valuations.

Let some fallen angels lie

Some investors blindly purchase stocks that have fallen significantly from their recent highs. Real estate stocks are their prime examples. Many have lost 80 odd per cent from their highs, and this has induced investors to indulge in 'bottom fishing'. Investors are merely finding the current rates attractive because they appear cheap in comparison to the prices prevailing earlier. Is there any evidence that those prices were the right prices, and the stocks are undervalued at today's rates?

The fundamentals and corporate governance of most listed real estate stocks are as bad as what they were two years ago. They do not merit investment because they are much cheaper than what they were before.One must wade through the morass in order to unearth some exceptions. If at all you have the ability, you can go ahead and invest. Otherwise stay clear of these 'fallen angels'. Do not be 'anchored' to old highs.

Expand your horizon

The past year has reinforced India's global economic standing. However, the Indian stock market has factored this and has outperformed many other global indices. Consequently, Indian stocks are no longer available at compelling valuations, either on an absolute or a relative basis. It is time for investors to look beyond Indian shores.

Many globally-reputed brands are available on the New York and London Stock Exchanges at valuations that are a fraction of the ones prevailing here.

The Reserve Bank of India permits an individual Indian investor to invest up to $200,000 in foreign assets.

Take experts' recommendations with a pinch of salt

As investors, we are beset with information overload today. Every television channel and business publication has morphed into an investment advisor. Try to cut out the clutter in the year ahead by not listening to the myriad recommendations doled out by the so-called 'experts'. True investing involves allocating capital to a limited number of high conviction ideas rather than frittering it away on mindless trading, based on someone else's recommendations. Often, an investment idea or two in a year is enough to create significant wealth over the long term.

Wishing you all the best for 2011.

Source : rediff business

Identify types of stocks as per financial goals

As an investor one gets confused while investing in stocks considering the huge number of companies listed.

Here are the details of different types of stocks which would help the investors to identify them as per their financial goals.

Growth stocks

These stocks are of the companies which are currently in the growth stage. They are looking at expanding their operations. These companies would be involved in new and upcoming fields. They are well-managed companies and the earnings and dividends are expected to grow faster than inflation and the overall economy. The company would be successful if it is able to create leadership and brand name, beat competition and have exceptional growth momentum through the various economic cycles. Since they require capital for growth, there is usually no, or very little, dividend income from growth stock.

Income stocks

These stocks belong to stable companies. They do not have large capital expenditure. They are in the mature stage. The profits are distributed to the shareholders in the form of a dividend. If you want dividend income and capital appreciation, you should look towards income stocks. Income stocks are sought by conservative investors wanting some exposure to corporate profit growth.

Value stocks

These stocks are currently at lower price than their fundamentals (i.e. dividends, earnings, sales, etc.). They are currently undervalued. These stocks have low P/E ratio and price to book value. The assets have more value than the current price.

Blue chip stocks

These are stocks of companies which are well-established companies and have stable earnings and no extensive liabilities. They can be income or growth stocks. They have a track record of paying regular dividends. They are relative safe and stability.

Source :ET