There are a lot of things that you should do before going head long into investing.

If you do right things, you could be the next Warren Buffet (The Albert Einstein’s equivalent for investors) or if you do crappy things, you might lose your pants. Whatever you do remember a few things, that might come often in various jargons.

1. Liquidity – How much money that you could take off in a moment’s notice. Say, if you have million dollars in a home, you might not be able to sell them off in a day for the expected worth, while you coud take off money from your checking account in a second. This is very important for investors and should always have minimum liquidity to carry on your daily life and anticipated difficulties and emergencies. Historically, gold was the most liquid instrument. Nowadays, you could have good savings banks, money markets and short tem Certified Deposits in the bank, to give you adequate liquidity.

2. Risk Worthiness. How much could you afford losing? You are starting a business. In the right conditions it will prosper and will bring you copious returns. But, what if things go a bit wrong, you might lose your pant if you had put all your money into it. Same thing with any investment (house, stocks…) and based on your age and immediate requirements, have a controlled risk portfolio and know the risks before investing. Not all investments are risky, and thus you should allocate different amount for each. But, the basic axiom is Risk & Rewards always go together. You cant have one without the other.

3. Information asymmetry: Not all things are equally risky and profitable, and some time there is an asymmetry in information. If you are investing in lottery tickets, everyone knows the same information, and so theoratically anyone could win. However, in investments like stocks the more you know & understand the subject, the business and underlying factors, you could be better off than other plays. The converse plays also. So, make sure you are at the right end. The joke goes that in stock markets bulls & bears win and the pigs get slaughtered. I’ll come back to this later.

4. Bulls – In investing terminology, bulls are the optimists who keep putting more money and raise the market. Being bullish means you are positive and willing to put more money and with bulls, the market will appreciate (go high).

5. Bears – Bears are the pessimists who either predict the end of the world, or believe that the market is getting carried away by over valuation. They generally take off money and try to push down the system.

6. Pigs – These are the common investors who dont know what’s happening out there. They just invest just because their neighbors do (or for any other silly reason) and dont have any intellectual predictions on the market. As axiom goes, these people will be the first losers in any collapse.

7. Stocks. In capitalistic societies, companies are subdivided into millions (or billions) of small components called shares or common stocks or equities. Since, normal people cannot buy out an entire company, they buy a small portion of it and have ownership to it. Thus, modern companies are all an aggregate of a large number of such smaller owners and the earnings are divided among them. Generally, the control of the company also rests with the shareholders, who together elect a board of directors to oversee the management of a company. If the company has greater earnings, share prices go up and converse holds true. Pricing a share is one of the most difficult things and its the whole of stock investing.

8. Bonds are similiar to bank deposits & loans. Big corporations and government raise money through this. When you release a bond, you try to get money and in return agree to give the principal after an agreed time and pay interest. Sometimes, you might get bankrupt and might not be able to return the money. So, you might have to give more interest to get your people as people will find you risky. In general, government bonds (called treasuries) give the lowest interest (as their risk of defaut is lower) and for corporations the interest is based on the amount of risk they face. In general, bonds are stable and since it is loaning (in contrast to owning stocks) you wont be rewarded extra when when the company progresses up, nor penalized during tougher times.

9. P/E or Price to Earning Ratio – This is the fundamental mantra for the investors. Price is total value of the Company (or Real Estate) in question and Earnings is the annual profit we can get out of that. In stock market, the companies are priced by multiplying the price of each stock by the total number of stocks, and this value is known as Market Capitalization. The ration of this price to the annual profits give the P/E. If P/E is 20, it means that for every 20 bucks you invest, you would annually earn 1 buck or 5% interest.

10. Fundamental Analysis Vs. Technical analysis – The whole science of stock market investing is about pricing a stock. There are two schools here. The Fundamental folks price by the earnings, the management worth, the market, consumers, etc and the Technical folks use the fundamental analysis of others, but totally predicting the stock by how much it moves, the direction, volume etc. You can learn more on this, as you start maturing.

As mentioned in the previous post, investing is a way of saving money for the future. It is the manner by which we grow our returns for the efforts that we put in, and being in capitalistic societies we measure the returns mostly by money. You could also put other factors for measuring this, and the bottom line is, a right investing is where after a course of time dt your investment grows by a positive increment dX

X ——————————> X + dX (after a time dt)

For example, the education that you had in your school and college is one of the best investments you woud have ever made. For your 50K * 4 years of expenditure, your returns are many times that amount, provided you had selected field closer to your interest and put efforts. If you had not put efforts or selected a bad area you lose most of your principal. Even if you had selected the right area, the returns will be few years after you start studying.

You can learn four things from this example. First, investment is not just putting money, but putting your brain in selecting the right area and once you steer yourself you to the right area, you put the right efforts.

Second, the time when the money was put in is much different from time you expect you take the returns. In other words, if you want the money to be doubled in a day, or expect returns next minute, you better to do horse gambling than invest. Investing is about patience and maturity.

Third, the returns should justify the investment. If you are going to put 1 million into some funky course that gives you a salary of less than 10K per month, u will never earn back the principal

Fourth, look for alternate investments and evaluate options. So, if you r given the option between investing 3 lakhs in a No.5 college with 2.5 lakhs in a No.6 college and investing the rest in good books and sports, you might select the second one that could give greater returns.

Once you understand these basics, you are all set to start investing.

Before, you begin investing do a lot of research. After all, its your money. Read a lot and dont fall for single articles or statements and go for a balanced view.

Some good investing magazines and sites that you must visit are:

Barrons, Wall Street Journal are must for US investing. Apart from that read Economist, Financial Times for world news and for india , I would suggest Economic Times, Financial Express & Business Standard.

Regarding sites, I would go in for Moneycentral.com, fool.com, investopedia.com, moneychimp.com for general investing knowledge and for indians you could go to valueresearchonline.com & moneycontrol.com.

Investing is just part of savings. The main difference between investing and other savings is the amount of time dt to get the returns. In other words, an investor should be patient to get his returns, while if you have savings that generally yield constant amounts, you could put in or take out any time. An example: you are starting a company. You have put a million dollars in it. You go the next month, can you get back the principal, leave alone the returns? But, in a year it might go to 10 million, as you start getting profits. Or you might lose everything. Everything is based on your efforts and selection. In comparison, you put the million in a bank, you might take it the next day (albeit with some penalty) and sometimes even with a small returns and in a year, it will grow in a similiar fasion – you will never get ten times of that, nor you might lose everything.

More on this next article—>

Investing is a process of saving for the future and managing in such a way that you can energise both your personal finances and the general economy. You could invest by starting a company or invest in stocks of companies, wherein you share ownership and share control.

I always wanted to invest but I didnt have much money to do. Recently, I joined Microsoft in a decent position and wanted to leverage this,  so that i could both secure the future dream I’m cherishing since age 10, and also enjoy the roller coaster ride of investing. And my favorite novel, “Kane and Abel” seems to have increased my determination.

This blog is about my experiments with investing. Join my roller-coaster ride.

Welcome to WordPress.com. This is your first post. Edit or delete it and start blogging!