Equity

The P/E Ratio or ‘Price to Earnings’ Ratio looks at the relationship between stock price and company’s earnings i.e., Earnings per share. It is sometimes also referred to as ‘Price Multiple’ or ‘Earnings Multiple’ The P/E Ratio is the most popular metric of stock analysis, though not the only one. PE is calculated as… Price to Earning = Market Value per share / Annual earnings per share The market value per share (numerator) is the current market price of a single share. The annual earnings per share (denominator) is the net income of the company for the most recent 12 months period divided by number of outstanding shares of the company. So, annual Earning Per Share (EPS) =  Net Income For Example: A company having share price of Rs.40/- and Earning Per share (EPS) of Rs.8/- would have a P/E ratio of Rs.5/-. P/E Ratio = Rs.40/- / Rs.8/- = Rs.5/- But what does this P/E ratio tell you? Essentially, the P/E Ratio gives you an idea of what the market is willing to pay for the company’s earnings. How come?                Some thumb rules: A higher P/E Ratio shows willingness of market to pay more for the company’s earnings. Some investors read a high P/E as an over-priced stock, which may be the case sometimes. However, it can also indicate that the market has high hopes for the share’s future and has bid up the price. Considering our previous example where P/E ratio is 5. Since this is a ratio of market value to annual earnings depicted as 5:1, this means that the market is prepared to pay Rs.5/- now for every single rupee of earning from a particular stock. Conversely… A low P/E Ratio may indicate ‘vote of no-confidence’ by the market which means that the investors have undervalued the stock due to lack of confidence in its future growth. However, it could also mean that this is a stock which has been overlooked by the market and does possess strong future growth potential. (a possible contra pick) If this is the case, they are considered value stocks and investors sometimes make their fortunes spotting these ‘diamonds’ before the rest of the market discovers their true value. So, what is the right P/E?…       There is no correct answer to this question because part of the answer depends on your willingness to pay for earnings. The more you are willing to pay (high P/E) means that you believe that the company has good long-term prospects over and above its current position. So, for some investors, a P/E of 5 would be a great deal while for some others a P/E of 5 for a particular stock is high. So, a P/E ratio also depicts the perceived value of a particular stock. Types of P/E       Trailing P/E: – In the example earlier, we have considered annual earnings per share (EPS), which is the sum of earnings for the last 12 months. This gives ‘trailing P/E’ or actual P/E based on known earnings figures. Forward P/E:- In the P/E ratio formula, you can use expected earnings per share (next 12 months) in place of previous annual earnings per share. This will give an idea of what could be the best price to pay for a particular share for its anticipated earnings. If earnings are expected to grow in the future the estimated P/E will be lower than the current P/E. If the estimated EPS is Rs.10/- and current market price is Rs.40/-, then the P/E would be 4 (Rs.40/- / Rs.10/-). This P/E is lower than the P/E given in earlier example, where the EPS was lower. Factors affecting P/E Ratio… Growth – Better the growth prospects of the company, the more willing people are, to be a part of that company by paying more per rupee of earning. Risk – The higher the risk, the lesser inclination people would have; to invest in equity shares thus affecting share price to an extent. Past Track Record – Track record is a major factor that determines consumer trust and willingness to invest in a particular company. Government Vision – Government’s approach and vision for a particular industry and company affects the P/E Ratio. Government restrictions on certain industries affects business of a company and hence its share price. Performance of Economy – General effects on economy; for e.g., monsoon etc. impacts company performance. A good monsoon leads to higher productivity, growth in economy and will reflect on the stock’s P/E.

Investors can be classified as growth-oriented and value-oriented investors. Growth-oriented investors invests in the form of capital gains as the company grows over time. Value-oriented investors, on the other hand, expect stable returns in the form of dividends along with capital gains over the long term. The dividend yield ratio is highly useful for value-oriented investors. For such investors, dividends obviously play a crucial role in their investment calculations. But, It is illogical to draw a distinction between capital appreciation and dividends. Money is money – it doesn’t really matter to an investor whether it comes from capital appreciation or from dividends, or a varying combination of both. In fact, investors in high tax brackets prefer to get most of their returns through long term capital appreciation because of certain tax considerations. Usually, companies that give high dividends not only have a poor growth record but often also poor future growth prospects. If a company distributes the bulk of its earnings in the form of dividends, there will not be enough to plough back for financing future growth. ‘Plough back’ refers to reinvesting business profits back into the business for financing business expansion and growth. On the other hand, high growth companies usually have a poor dividend record. This is because such companies usually use a small proportion of their earnings to pay out dividends. In the long run however, high growth companies not only offer steep capital appreciation but also end up paying higher dividends as their business capacities begin to expand. On the whole , you are likely to get much higher total returns on your investment if you invest for capital appreciation rather than for dividends. It all boils down to whether you are prepared to sacrifice immediate dividend income for greater future capital appreciation and therefore higher future dividends. It is basically a trade-off between capital appreciation and income. This relationship between dividends and the market price of company’s shares is expressed by a ratio called ‘Dividend Yield’. Dividend Yield Ratio It is expressed as:-          Yield  =  Dividend per share /  Market Price per share  X  100 Yield indicates the percentage of return that you can  expect by way of dividends on your investment at the prevailing market price. Let us assume that you invested Rs.10,000 in buying 500 shares of ABC Ltd. at Rs.20/- per share with a face value of Rs.10/- each. If ABC Ltd. announces a dividend of 20% (Rs.2/- per share), then you will get a total dividend of Rs.1,000/-. So, the yield on your investment is:-          Rs. 2 (Dividend)  / Rs. 20 (Market Price)  X 100 = 10% Thus, while the dividend was 20%, your actual yield on the dividend earned comes to 10% The concept of Yield is of far greater practical utility than dividends. It gives you an idea of what you are earning through dividends on the current market price of your shares. So, a higher dividend yield may be desirable from an investor’s perspective. But a high dividend yield can also mean that the stock is underpriced (low denominator) or that the future dividends might not be as high as previous dividends. Similarly, a low dividend yield might mean that the stock is overpriced (higher denominator) or that future dividends might be higher.

Bonus share issue and stock splits are two common corporate measures used by companies to increase the number of shares available for trading. Both of these words are commonly misunderstood by investors. Shareholders are rewarded in a variety of ways by the companies. These benefits can come in the shape of dividends or additional shares. Shareholders do not have to pay anything more in the case of bonus Shares or stock split. But what are bonus shares and what are stock splits and more importantly what’s the difference between them? When a company earns a profit, it either distributes part of its profits as dividends and keeps the other part as reserves for future investments. Or sometimes it could keep the entire profit as reserves as well. Over the years, after the payout of dividend, it is possible that the reserve amount grows and becomes substantial. At this stage the company might want to capitalize on this reserve. By this we mean that it will convert part of the reserves into shares. This is called expanding the authorized share capital. Now how does the company do this? Let’s say the company wants to capitalize Rs.1,00,000/- (Reserves) At Rs.10/- per share this translates to 10,000 shares. Let’s say there were a total of 10,000 shares in the market at this point in time. So, there are 10,000 shares in the market & there are 10,000 shares created from reserves. In other words, for every share the company can provide one bonus share. In this situation, we say that the company has declared a 1:1 bonus. Thus, after the bonus issue there would be 20,000 shares in the market. At this point, it’s important to understand that the market value of the 20,000 shares would be the same as that of the erstwhile 10,000 shares. Hence the value of a single share would fall proportionately. Thus, if the market price of 10,000 shares was Rs.15/- each, the market capitalization was Rs.1,50,000/-. Now, after the bonus shares have been released the total number of shares goes up to 20,000 but market capitalization stays at Rs.1,50,000/- and hence the price per share falls to Rs.7.5/- (150,000/20,000). Remember market capitalization is a function of the profits of the company during a year. Therefore, just by issuing shares the profits of the company made during the year does not get affected. Hence market capitalization does not change. So, to sum up when shares are formed from the reserves and distributed to shareholders, we say the company has issued bonus shares. In the case of bonus shares, the market capitalization remains unchanged and price of the share in the market drops proportionately in keeping with the number of bonus shares issued. Now let’s see what’s stock split. Over a period of time as companies grow and get more profitable their market prices too start rising. For example, let’s say company’s share value has risen to Rs.10,000/- per share over a period of time. Many people would find it difficult to transact in such a stock because of its high price. For example, an investor may have only Rs.5,000/- to invest. Such a person would not be able to buy this stock because its price is Rs.10,000/- which is beyond his means. Thus, to help such investors to participate in stocks where prices have gone up, the company goes for a stock split. Essentially what it means is to split the stock into smaller units of less value such that its liquidity in the market increases and more investors can participate. So, in our example, the Rs.10,000/- stock could be split in 4 parts, each of Rs.2,500/- in value. So, whosoever owns a stock of this company, will now have 4 stocks instead. So, again Rs.10,000/- x 1 stock = Rs.2,500/- x 4 stocks. Just like in a bonus share here too the market capitalization does not increase. Thus, in the case of bonus shares, we saw that the company created new shares out of the reserves of the company while in the case of stock split, the split was to reduce the market price of the stock to increase liquidity. In case of bonus shares, the market reacts positively because by issuing bonus shares the company indicates that it is expected to increase profitability in order to regain the market value of its share. In case of a stock split the market would react positively as the split was engineered due to high stock price (which also indicates that the stock is good). So, in a sense the market takes notice and reacts positively.

You may have received communication from banks or telecom companies promising rewards in exchange for “going green” with monthly bills. Such incentives are advantageous to both the company as well as the customer. The customer gains from discounts and the banks or telecom companies save on printing and dispatching cost. Today\’s topic is somewhat similar. Let us attempt to explain the interesting concept of ‘Differential Voting Rights’ (DVR) to you. What are DVRs? Differential Voting Rights shares are like ordinary equity shares, but with fewer voting rights. Also, DVR shares are priced lower at issuance and offer higher dividends in return of limited voting rights. For instance, the DVR shares holders of XYZ Ltd. can exercise one vote for every 100 shares held versus a normal shareholder who can vote as per the number of shares he holds. The voting rights on DVRs differ from company to company. However, DVR shares get more dividend than ordinary shareholders. Why are these DVR issued by companies? Companies issue DVR shares for following reasons: By issuing DVR shares, company can decide on how much of its powers to dilute, also the company can retain control and raise money. To prevent hostile takeovers and dilution of voting rights. Helps strategic investors who do not want control but are looking at a reasonably big investment in a company. At times, companies issue DVR shares to fund new large projects. Due to fewer voting rights, even a big issue does not trigger an open offer. Differential voting rights allow investors to earn better returns in lieu of surrendering their voting rights; it allows a company to dilute its equity without matching dilution in the promoters’ stake. When can a company issue DVRs? The Companies Act permits a company to issue DVR shares when, among other conditions, the company has distributable profits and has not defaulted in filing annual accounts and returns for at least three financial years. However, the issue of such shares cannot exceed 25 per cent of the total issued share capital. Who should invest in DVR shares? DVRs are a good investment option for long-term investors, typically retail investors, who prefer to receive higher dividends and are not necessarily interested in taking part in the decision-making and voting process of a company. Though DVRs are listed on the bourses in the same way as ordinary equity shares, they trade at a discount to the price of the ordinary shares and are thinly traded shares, which mean these are highly illiquid stocks. So, finding buyers may be a little difficult. Examples of DVR Shares Tata Motor, Pantaloon Retail India, Gujarat NRE Coke and Jain Irrigation.

EPS or Earnings Per Share is the portion of the company’s distributable profit which is allocated to each outstanding equity share. A company’s EPS is calculated as:                                  Net Profit for a period / Number of Shares That means, if Company ABC has posted a net profit of Rs.1,000/- and it has a total of 100 shares, its EPS will be Rs.10/- per share. So, what are the different types of Earnings? Earnings can be sub-divided further according to the time period involved. Earnings can be assessed by Trailing – Prior earnings Current – Recent earnings Forward – Projected future earnings  Why EPS? EPS is the amount of money each share would receive if all the profits were distributed to the outstanding shares at the end of the year. EPS helps compare two companies. Higher EPS is better than a lower EPS because this means the company is more profitable and has more profits to distribute to its shareholders. EPS is also a key driver of share prices. It is also used as the denominator in the frequently cited P/E ratio. Let’s consider a simple example: Company X and Y have earned a profit of Rs.150/- each. However, Company X has 75 shares outstanding and Company Y has 100 shares outstanding, which one would you prefer? Your answer lies in the EPS figure. Company X has an EPS of 2 (150/75) whereas company Y has an EPS of just 1.5 (150/100).  So, you prefer the company X that pays you more profit per share than Company Y. When does EPS increase? An increase in a company’s EPS doesn’t necessarily mean that the profitability has gone up; profits can also remain flat or even fall. It could be because of changes in capital structure like a buy-back program or merger & acquisition, due to which the number of shares has reduced. All this would result in an increase in EPS. Suppose, the profit of Company ABC reduces to Rs.900/- instead of Rs.1,000/- and total number of shares reduce to 85 instead of 100 shares, due to its share buy-back. Here, the EPS would go up to Rs.10.59/- per share instead of Rs.10/-. When does EPS go down? Just like the increase in EPS, a dip doesn’t mean that the profitability of a company has gone down. A public offer or an activity to raise fresh capital could decrease the EPS. Even share splits can reduce the EPS. Let’s assume that the profit of Company ABC goes up to Rs.1,100/- and it raised its total number of shares to 120. This would mean the EPS would go down to Rs.9.17/- per share, while the company remains profitable. How to use EPS? Remember, EPS should not be the only measure to influence your decision. If you own a stock whose EPS has fallen, you should not be in a hurry to exit. When deciding whether to stay invested or not in a stock that has witnessed a fall in EPS, you should identify the reason behind the decline.  

We normally hear of promoters raising capital by issuing shares in the market. But there are times when the promoter wishes to buy back the shares from the investors. At such times they offer a buy back at a price which is better than the market price. Buybacks can be carried out in two ways: Shareholders may be presented with a tender offer whereby they have the option to submit (or tender) a portion or all of their shares within a certain time frame and at a premium to the current market price. This premium compensates investors for tendering their shares rather than holding on to them. Another option is when Companies buy back shares on the open market over an extended period of time. There are several reasons for the company to buy back shares… No promoters like to see the prices of their company falling. Therefore, if they feel that the price of shares is falling in the market, they may decide to buy back shares to shore up the prices. Another reason the promoters might offer a buy back is to increase their share-holding if they feel that someone in the market is buying a large number of shares of their company in a bid to take over the company. To protect themself from such a takeover bid, the promoters offer a buy back of the shares to their investors at an attractive price. In other words, for the promoter, it is another way of giving back money to the investors. To serve the equity more efficiently and to increase the earnings per share. The promoters may also buy back shares from the market, if they feel that the price of the share is lower than its intrinsic value.  Advantages It is an alternative mode of reduction in capital without requiring approval of the Court/CLB(NCLT). To improve return on capital, return on net worth and to enhance the long-term shareholders value. To provide an additional exit route to shareholders when shares are undervalued or thinly traded. To enhance consolidation of stake in the company. To achieve optimum capital structure. To return surplus cash to shareholders. To support share price during periods of sluggish market condition. </li style=\”text-align: justify;\”>To prevent unwelcome takeover bids.

Some people enjoy dancing in the rain but some really hate getting drenched. Some people enjoy the stock market volatility but some get killed by the same volatility. Different people view the same thing differently. But all of them seek one thing above all else: Clarity. I will try to provide clarity on the ‘India Volatility Index ’ or ‘ India VIX ‘ in short. First of all, Volatility denotes the extent to which the value of our investment may be subject to the mood of the market over a given period of time. In other words, volatility refers to the amount of uncertainty or risk about the size of changes in a security\’s value. Commonly, it is observed that the higher the volatility, the riskier the security. So, what is Volatility Index? A volatility index tells us about the market expectations over the short term, usually a month. It tries to capture the sentiments of the market—whether the market is in a complacent or anxious mood. Volatility is what makes our short-term investments look more dangerous than our long-term investments. Some investors feel that surviving short-term market volatility is more challenging than surviving in the long run. Now… Volatile markets can turn upside down in very quick time. In fact, John Maynard Keynes himself once said that markets can remain irrational longer than you can remain solvent. So, every now and then, we may see investors getting caught on the wrong side of market irrationality. A volatility index captures implied volatility in the market. Okay, so how does it work? Implied volatility draws its conclusions from the present pricing of options and not from historic volatility figures. It is expressed in terms of a percentage like 20%, 30%, etc. In a range-bound market, where prices are moving gradually, the volatility index remains low. It is believed that when the volatility index is less than 20%, the market is in a complacent mood and is not expecting any catastrophe. Now… A low volatility index is therefore, associated with price rise. But when the volatility index is greater than 30%, then the market is in the fear zone. A high volatility index is associated with a fall in market prices.  In this manner, a volatility index helps investors gauge the mood of the market. So, what is the India Volatility Index? India Vix is the first volatility index launched in India by the National Stock Exchange. For your additional information, the Chicago Board of Options Exchange (Cboe) introduced the first volatility index for the US markets in 1993. Cboe Vix uses the Standard and Poor’s 500 Index Options for calculating implied volatility, which is reflected by the changes in pricing of options. India Vix is based on the Nifty 50 Index Option prices. Okay, so how does it work? It calculates the percentage of volatility by using a detailed computational methodology which relies on the best bid and offer price of the Nifty 50 index call and put options. Other than gauging the mood of the stock market, a volatility index can also be used to design derivative products in which the volatility index is used as an underlying asset. Investors who are averse to volatility can hedge their portfolio by purchasing derivative products based on the volatility index. And investors with a good appetite for volatility can take the risk by selling the same derivatives product. All in all, a volatility index provides a new game of hedging and trading for market participants. But how is hedging through volatility index derivatives different from hedging through single stock or index derivatives? Well, hedging through single stock or index derivatives is like purchasing a comprehensive insurance which covers many risks that you may not be even aware of. But a derivative product based on volatility index keeps its focus narrow— it provides a hedge against only market volatility. Finally… So, if the prices of your company’s shares are likely to fall due to poor quarterly results, then purchasing volatility index derivatives may not protect you. The market may remain calm even though your own individual portfolio may be performing badly. But if the prices of your stocks are likely to fall due to poor market sentiments and not due to any company-specific reason, then a volatility index derivative may be your right bet. To Sum Up What: Volatility index measures implied volatility in the market over the short term, usually a month. India Vix is the first volatility index launched by the National Stock Exchange. How: India Vix calculates volatility by computational methodology, which relies on the best bid and offer price of the Nifty 50 index call and put options. When: Volatility index can also be used for designing derivative products in which the volatility index is used as an underlying asset.

As individual we all experience ups and downs in our personal and professional life. Sometimes even an emotional roller coaster ride that you can\’t quite imagine. You feel good while going up. But as it comes down at a faster pace, you experience panic and fear. In a similar fashion, the occurrence of ups and downs in an economy over a period of time is known as the economic/business cycle. These cycles of an economy can be categorized as expansion, peak, recession, and recovery stages. But the ones who show resilience and patience are the ones who can overcome with flying colours. In the same way, as the economy goes through numerous ups and downs so does some companies and sectors. A cyclical stock is one whose underlying business generally follows the economic cycle of expansion and recession. Profits and share prices of cyclical companies tend to follow the up and downs of the economy; that\’s why they are called cyclicals. When the economy booms, sales of cars, air tickets, homes etc. tend to increase. On the other hand, cyclicals are prone to suffer in economic downturns. Let us consider an example. Suppose the economy is booming and income levels are rising, then more and more people will be willing to purchase homes. This will result in more construction activity and home prices are also likely to rise. As a result, companies in the business of construction and selling housing properties will see an increase in their profits and share prices. Contrary, if the economy is slow, less people are likely to invest in the housing market and share prices in the stock market of these construction companies will also suffer in line with lower profits. However, not all businesses are dependent on economic cycles. Companies operating in the business of basic consumer goods don’t get affected since demand for their products and services continue regardless of the state of the economy. For instance, if the economy slows down and, as a result, consumer confidence takes a hit, people may postpone or cut expenditure on discretionary spending such as buying a new car, traveling abroad or buying luxury item but they may not cut expenses on essential items such as toothpaste, electricity, healthcare etc. Therefore, companies in the business of producing and selling basic consumption goods are least affected by economic cycles. Shares of such companies are termed as non-cyclical or defensive stocks. Cyclical stocks can be classified under two categories. Rate Sensitive Sectors  These are the businesses which are primarily affected by the interest rates prevailing in the economy and thus any contraction or expansion in economy consequently affects them. Auto companies, banks and capital goods fall under this category. Commodity Based Sectors  Earnings and cash flow of these businesses are dependent on the demand & supply of their products/raw materials. During expansion, there is increase in demand, resulting in business expansion; whereas in the times of recession, the demand gets subdued, leading to business contraction. Metals, mining, sugar, cement companies etc., follow these patterns. So, how do you identify a cyclical stock? Before selecting a cyclical stock, it makes sense to pick an industry that is due for a revival. Declining interest rates and growing consumer spending signals towards the economic expansion. Then, in that industry, choose companies that look especially attractive. Predicting an upswing can be extremely difficult, especially since many cyclical stocks start doing well many months before the economy comes out of a recession. Buying requires research and courage. On top of that, investors must get their timing perfect. It pays to keep an eye on the business cycle and know where it is and where it is going. For conservative investors non-cyclical stocks many of which also pay good dividends may make more sense while building a portfolio. However, keep in mind that this relative safety comes with a price and that is missing growth opportunities in an up market.

What is Market Capitalization? The technical definition of market capitalization, often dubbed as market cap, is that it is the market value of the outstanding shares of a company. In similar words, the market value of all the shares that are held by the company’s shareholders is known as the market capitalization. It is not the share price but the value of the share. I ask you one question: The share price of Company A is Rs.50 and that of Company B is Rs.60. Which company has more value? Which company will be more stable? The answer to this question is not easy since the information provided is limited. Now, if we say that Company A has 700,000 shares in the market and Company B has 5,00,000 shares in the market, then which company has more value? This makes more sense now. So, the total value of the outstanding shares of both companies is: Company A – 700,000 x 50 = Rs.3.50 crore Company B – 500,000 x 60 = Rs.3 crore Hence, Company A has a higher market value than Company B. This is market capitalization or market cap. The formula to calculate it is: Number of outstanding shares x share price Difference between Large-cap, Mid-cap & Small-cap Shares. Large-cap are big, well-established companies in the equity market. These companies are strong, reputable and trustworthy. Large-cap companies generally are the top 100 companies in a market. There is no consensus on the capitalization as such. Stocks of large-cap companies are the least risky investment instruments. Investment in large-cap is best suited for investors with low-risk appetite. The liquidity of shares of large-cap is very high because they are reputed, mature and firmly established players in the market. They are highly followed in the stock market and usually tapped by institutional investors. Mid-cap are compact companies of the equity market, falling somewhere between small and large-cap companies and are 100-250 companies in a market after large-cap companies. Stocks of mid-cap companies are the riskier than large-cap but not as risky investment instrument as small-cap. Mid-cap shares have better growth potential and give investors higher returns on investment as compared to large-cap shares. Investment in mid-cap companies is best suited for investors with moderate risk appetite and is most popular among investors. The liquidity of shares of mid-cap companies is more as compared to small-cap companies. Highly followed in the stock market and usually tapped by institutional investors. Small-cap are small companies in the stock market and are all the companies apart from large and mid-cap companies in a market. i.e., all companies above 250. Stocks of small-cap companies highly risky and volatile investment instruments. Small-cap companies have exponential growth potential and give investors high returns on investment. Investment in small-cap is best suited for investors with high-risk appetite and have good knowledge of the stock market. The liquidity of shares of small-cap companies is least. They are under followed in the stock market and usually untapped by institutional investors, giving a huge opportunity to wise investors to grow their investment quickly. So, it completely depends on the investor’s ability to take risk and how much he is willing to put at stake.

Equity is a one financial instrument by which company invite the public to invest their money in the company and investor can become a partner of the company. Generally, when the company have insufficient money to expand its business it comes with IPO i.e. Initial Public Offering. Equity represents the value that would be returned to a company’s shareholders if all of the assets were liquidated and all of the company\’s debts were paid off. We can also think of equity as a degree of residual ownership in a firm or asset after subtracting all debts associated with that asset. Equity represents the shareholders’ stake in the company, identified on a company\’s balance sheet. Shareholder Equity Formula The following formula and calculation can be used to determine the equity of a firm, which is derived from the accounting equation, Shareholders’ Equity = Total Assets − Total Liabilities Equity can overcome inflation in long run provided invested properly. Since inception i.e. 31st March, 1979, BSE Sensex was 100 points and on 31st March, 2021 i.e. after 41 years BSE Sensex was 47,807 points. Sensex has given approximately 16.24% CAGR. (Compounded Annualised Gross Return) Principles for investing into equity market. Sell the looser and let the winner ride. Don’t let the looser be in your portfolio. There is no guarantee that a stock will bounce back after a protracted decline. While it\’s important not to underestimate good stocks, it\’s equally important to be realistic about investments that are performing badly. Don\’t be afraid to swallow your pride and move on before your losses become even greater. Don’t chase the hot tip. Do your own research and analysis of any company before you even consider investing your hard earned money? Tips will never make you an informed investor, which is what you need to be successful in the long run. Don’t sweat the small stuff. Do not panic when your investments experience short-term movements. Remember to be confident in the quality of your investments rather than nervous about the inevitable volatility. Do not over emphasize the P/E. Ratio. Investors often place too much importance on the Price Earning Ratio (P/E ratio). Simply using P/E Ratio to make buy or sell decisions is dangerous and not advisable. A low P/E ratio doesn\’t necessarily mean a security is undervalued, nor does a high P/E ratio necessarily mean a company is overvalued. Do not pick the penny stocks. A common misconception is that there is less to lose in buying a low-priced stock. But whether you buy Rs.5/- stock or Rs.100/- stock if it becomes Rs.0/- you’d still have a 100% loss of your initial investment. In fact, a penny stock is probably riskier than a company with a higher share price, which would have more regulations placed on it. Pick a strategy and stick with it. Once you find your style, stick with it. An investor who flounders between different stock-picking strategies will probably experience the worst, rather than the best, of each. Constantly switching strategies effectively makes you a market timer, and this is definitely territory most investors should avoid. Focus on the future. The tough part about investing is that we are trying to make informed decisions based on things that are yet to happen. It\’s important to keep in mind that even though we use past data as an indication of things to come, it\’s what happens in the future that matters most. Be invested for long term. Keep a long term investment horizon and just try to avoid large short-term profits. It can often entice those who are new to the market. Long term investment will built wealth and short term investors will only land up with profits. Be open-minded when selecting companies. Thousands of smaller companies have the potential to turn into the large blue chips of tomorrow. In fact, historically, small-caps have had greater returns than large-caps over the decades. This is not to suggest that you should devote your entire portfolio to small-cap stocks. Rather, understand that there are many great companies beyond those and that by neglecting all these lesser-known companies, you could also be neglecting some of the biggest gains. Taxes are important but not that important. Putting taxes above all else is a dangerous strategy, as it can often cause investors to make poor, misguided decisions. Yes, tax implications are important, but they are a secondary concern. The primary goals in investing are to grow and secure your money. You should always attempt to minimize the amount of tax you pay and maximize your after-tax return, but the situations are rare where you\’ll want to put tax considerations above all else when making an investment decision. While it may be true that in the stock market there is no rule without an exception, there are some principles which are tough to dispute. Keep in mind that this information is quite general, each with different applications depending on the circumstance. There is an exception to every rule, and we can\’t over emphasis this point.