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 The most important part of planning for personal investment is the asset allocation one decides to have in a portfolio that includes making decisions regarding the percentage of investment that should be made in stocks, in bonds, in insurance policies or in pension plans, based on investment objective and risk bearing capacity of the investor. Once the investor decides that he has to put a certain percentage of his money into stocks, the most difficult decision that he is confronted with is how to select stocks to invest in to achieve the desired diversification. There are so many analysts speaking most of the time not in a synchronized language, but offering diverse views that it is very difficult to decide what stocks to select for the investor who does not want to take the trouble of going out to seek professional advice.
The stock charts provide the most important source of information, that is, the behavior of price of a stock in the past. Though the past movement of a stock is no indicator that it will display the same pattern in the future, looking at the historical price movement does provide some primary information about the potential returns and losses from owning that stock. Apart from the historical behavior of the stock itself, it is also important to look at the performance of the sector that stock belongs to, in order to make some inference about the behavior of the entire sector in the past and also to get some idea as to whether there is any abnormality in the returns in a particular stock or the entire sector has been displaying a similar pattern in the past, in which case the investor can feel more confident of getting similar returns in the future.
The investor should definitely spend some time on going through the quarterly or annual reports announced by the company recently to find out the pattern of some of the basic indicators in the financial statements, for example what is the pattern of profit earned by the company in the recent past; are there sufficient justification that the same pattern is likely to continue for some more time in the future; does the management have plans of expansion or growth in coming years; are the assets of the company showing an increasing trend indicating thereby that the company might be moving on the path of expanding its business; are the liabilities of the company showing an increasing trend pointing some indicators towards company going in the red; what is the debt component of the financing capital as too little or too much of debt component both signify high levels of risk for a publicly traded company. It is also important to keep track of the latest news and reports concerning a particular company appearing recently, especially after the announcement of its annual or quarterly reports that one is following.
The most important step is to decide the timing of investment. A great stock can give ordinary returns if investment has been made at a time when the stock price was hovering around the top level achieved by the stock in recent past, at least in the short term, and an ordinary stock may give quite high returns if investment has been done at its rock bottom level. |
