Over the course of the last few weeks, I have written several posts on basic aspects of equity as well as investing in it. Based on some requests that I have received from the readers, I thought it will be a good idea to create a basic guide that people will be able to go through in a systematic manner. This post will fulfill that need. As before follow the hyperlinks in blue color to open up new tabs for the relevant posts.
To begin with you need to understand what exactly does equity mean. Read this post to understand how equity works. Next thing you need to understand is what are stock markets and indices. For people who are used to debt instruments and real estate understanding the nature of stock market returns is an important learning.
Many financial planners will ask you to invest in SIP with the implicit understanding that the returns can be looked as compounding. This is completely misleading and you need proper understanding of this to avoid serious mistakes with your finances. Read the post Equities and compounding to get a handle on this. We need to invest in equities not because of compounding but due to the fact that it gives us great potential for growth in our investments. Why this happens and how is elaborately explained in this post.
It is correct that equity is an asset that is best invested for the long term. However it is also right that returns in equity are non-linear in nature and can even be negative over a period of time. The post Fallacy of time dependence explains well what you need to know about this concept.
Pricing in equity is something that most people find mysterious and difficult to understand. This post will give you a basic understanding of equity pricing. The next post A more detailed look on pricing will help you understand price movements better. The obvious question most investors ask is which stocks should I buy and at what price – I have tried to answer this question through this post. As expected the post generated a lot of comments and I had written another post with explanation of my methodology.
Read the above posts multiple times if you require to get a clear picture of how equity operates as an asset class. Your equity investments will benefit immensely once you have understood these concepts well and are able to apply them.
Investing in direct stocks is of interest to many readers and I will soon start writing a series on that.
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