Investing Tip for Ordinary Investors

Author: ajay

Investing in the share market is widely perceived as a risky business. But does it mean that one should shy away from investing? Definitely not! Share market has always been an attractive domain to invest in and one can derive profits regardless how volatile (risky) the market is.

Bear in mind, always there is a trade-off between risk and reward and a magic to pocket gain by assuming no risk is yet to be discovered. Here the only question before an investor is the way to optimise the risk-return trade off. But, what if the market is highly volatile and you are an ordinary investor? By ordinary investor I mean one who looks for moderate profit by taking moderate risk; over ninety percent of the investors (investors, not speculators, those who look for swift- huge gain by taking high level of risks) belong to this category.

The general perception is that a highly volatile market is not appropriate for the ordinary investors since enabled to assume a moderate risk is hardly possible while the best one can try for is to optimise the reward by taking high risks. But it is a wrong perception and a moderate risk-return trade off is very much possible despite the market is highly volatile, provided you are wise enough to make a ‘right portfolio’.

A right portfolio for an ordinary investor in a highly volatile market should have the following characteristics.

v Minimized volatility.

v Formed of shares of the companies with high growth rates and profit margins and belong to the industries having good prospects.

Risk of investing in a share can be bifurcated as risks due to market factors and factors solely pertaining to the company and industry. You might have noticed and wondered why the price of your share drops when there is an oil price hike or a serial bomb explosion despite your company is no way connected to those. You might have bewildered by seeing that you lose as the market index drops despite your company run strongly without any tangible evidence for the share price to drop. These mean that price of every share is somewhat correlated to the market and always there is a risk out of the performance of your company and which is referred to as market risk. A major ground for market risk is the role played by market sentiments to determine the movement of prices of shares. An oil price hike or a serial bomb explosion will deteriorate the investors’ confidence and every one will be in a hurry to safeguard their capital and hence a bullish trend is created in the market and the market index drops. How it will affect the price of your share is depend on how strongly it is bonded to the market index. The strength of this bonding is measured by beta (b). Beta of a share is measured based on the historical up and down movements of share price in comparison with the market index. A beta of 1 means if the market index gains or drops by 1% your share price will also move accordingly by 1%. The beta of a portfolio is nothing but the weighted average beta of the individual shares. Shares or portfolios with a beta above and below 1 are referred to as aggressive and defensive shares or portfolios respectively.

In a highly volatile market, being an ordinary investor, you have a high probability to be better off by having a defensive portfolio, portfolio of beta below 1. The benefit is that you will be less likely to be affected by the market related factors and the performance of your portfolio to a great extent will be depending on the company and industry related factors.

Minimizing volatility should not lead you to forget to undertake a proper analysis on the companies to invest in. Selection of the companies with excellent prospects is equally important. Although there are a number of parameters pertinent in analysing a company, revenue growth and the profit margin are the key ones. Both have to be compared with the industry average and the companies figure above the industry average should be chosen. You should also remember to choose companies that belong to the industries having good prospects.

What discussed here is not the ultimate strategy to maximise return from share market, but the way to ensure an optimal risk- return trade off in a highly volatile market by wearing an ordinary investor’s shoes.

About the Author:

Article Source: http://www.articlesbase.com/investing-articles/investing-tip-for-ordinary-investors-563947.html