quinta-feira, 2 de abril de 2009

How to become a better than average Investor , Part 1


How to become a better than average Investor , Part 1

I am starting a series of articles which will deal with "How to invest in stocks efficiently" . This post is Part 1 .

There are two important questions which you have to answer when you want to buy shares ? They are "What to buy" and "When to buy" ?

You may be familiar with Fundamental Analysis , Fundamental Analysis answers the question "What to buy" ? . It a study of companies Financial statements , cash books , markets study to find out the future prospects of a company. It answers the question "Will this company be a good buy for long term" ? , "Will it be more valuable than what it is now " etc etc "

But !! , Even though you have picked up some excellent companies for your long term investments , That's not the end of the story . Now the biggest challenge and question you have is "When to buy it" ?

You should not just go next day and buy the share , that's not the right approach . There can be a price area where buying is best in terms of risk/reward .

Technical Analysis is the study of charts , price and volume patterns and other indicators derived from price and volume . Technical Analysis gives us hint on what can happen in future , understand that it only gives you chances, not a guarantee . So everything should be taken with crossed fingers , Decisions taken on basis of TA only increases your risk/reward scenario .

I will give you an example :

Reliance is a very good long term Investment (do your own analysis to find out why, but it is :) ) .

On Feb 1 2009 , Ajay and Robert want to invest Rs 1 lac in Reliance for long term . Both of them understand that Reliance is truly long term buy . Ajay invests in Reliance on Feb 1 , because share is going up and he feels its a good time to enter other . He buys the stock at Rs 1360 . After some days Stock starts falling and reaches around Rs 1,150 . Roberts buys the stock at that time .

see the chart here

Here you can see that Robert has got the stock at 15% lower price , which means his profits will always be more than Ajay's by that much . What did Robert do ? Robert used simple Technical Analysis concepts and entered in the stock with better prices , It does not mean it will always happen , but there are good chances for getting better price .

In the above case of Reliance , there is no significant price difference , but there can be cases ,where there can be drastic differences , and it would be really worth to use basic Technical Analysis .

Dont be scared , I will tell you some very basic things of technical Analysis in some of next post .

I will talk about

Part 2 : Support , Resistance
Part 3 : Trend Lines
Part 4 : Simple Oscillators to use for short term investments .

Watch out for second part soon .

Please share any real life example which happened with you , May be we all can try to find out what could have been done to make a better entry or exit from stock .

cheers :)

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