5 Principles of Equity Investing

There cannot be a single size that fits all equity investors. While one may have generated excellent stock returns, it may not have been a pleasant investment experience for another individual in the same stock. Instead of following the herd and buying what everyone else is buying, the investors must research about the companies before investing.

Equity investing is all about selecting companies with good growth potential. However, such investments are also subject to market risks. As such, the investors must choose such companies wherein there is an adequate margin of safety between the current price and the company's inherent value. This ensures that the stocks can appreciate well during the market rallies, further restricting the downside during the market corrections due to already subdued valuations.

It is often said that one should not hold all its eggs in the same basket. Similarly, one should not have an investment portfolio concentrated around a few stocks. This can cause an excessive reliance on the performance of specific stocks. Instead, one must have a well-diversified portfolio of stocks spread across different sectors and market capitalization segments. Such diversification tends to mitigate the investment risks to some extent, as favourable events for another segment may offset the adverse events for one sector.

Equities can be extremely volatile over the short-term but tend to create wealth for the investors over the long term. One may be tempted to keep track of the daily price movements of their equity holdings. While the investors can check the valuations of their equity holdings through stock exchanges, it is not advisable to keep a regular watch on the long-term investment portfolio. This is because the investment portfolio's short-term movements may impact the investors' decision to hold or sell the stock.

It is important for investors to preserve cash, just like it is important for them to generate returns. Having sufficient liquidity in hand allows the investors to take advantage of the market volatility and buy stocks when the markets are in correction mode. As the overall market sentiments may pull the market prices of even fundamentally strong companies lower, investors may be able to purchase the stocks at bargain prices.