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5 Easy Steps to Become A Smart Investor

5 Easy Steps to become a Smart Investor

Investing in can probably be more rewarding than you can imagine and certainly very exciting! World over the wealthiest people are those who have invested wisely.

If you are scared to take the plunge, these are the 5 steps you should be following.

Step 1: Understand How the Whole Process Works

How did you learn to read ? you started off with A-B-C. First you learned capital letters, then came the smaller ones and finally those running letters. At the end ,you have your own distinguished style of writing and reading . Follow the same logic here. For investing in anything, the first step is to Learn the basics.

Step 2: Learn How To Choose

It is important to know how to go about selecting an investment at the right price-be it shares or gold or real estate. A little bit of research, some theoretical and practical knowledge will ensure that things seldom go wrong.

Step 3: Decide How Much To Invest

You should not throw all your savings at one particular investment because, any investment would carry certain amount of risk. So the answer to the question how much to invest would depend on your risk profile. ( i.e. your risk tolerance capacity )

Step 4: Monitor and Review

Monitoring your investments regularly is recommended. This is more important during volatile times when there can be great opportunities for buying and averaging your cost of investment..

Step 5: Learn From Your Mistakes

Investing is a long, learning experience. You will make mistakes, but also learn from them .When reviewing, do identify and learn from your mistakes. Nothing beats first-hand experience. These experiences will help you emerge as a smart investor.

Stick to these basics and sail smoothly into your financial bright future.

Difference Between Investing, Trading and Speculation

Difference between investor trader and speculator

Investing is the proactive use of money to make more money or, to say it another way, you make your money work for you.

When you invest, you are buying an asset like shares, real estate or gold. The basic idea is to sell it at a future date when the value of these assets appreciates.

An asset can include anything from a small business to fine art, rare wines to gold coins, stocks, mutual funds, bonds, real estate, antiques, song rights, patents, trademarks, or other intellectual property.

Good investments are the soundest way of growing wealthy but can take time, perhaps even years, to work out because we live in an uncertain world.

Depending on the asset class in which you invest, the potential for profits and risk will also differ.

Investors adopt a “Buy and Hold” approach.


Trading is a more short term activity than investing. It’s buying something at low prices and selling it for a gain. Trading can be done in many fields. So the crucial factor that distinguishes a trade from an investment is the length of time you hold on to the assets.

A trader is always concerned about short-term fluctuations in prices, because he’ll even out them in the long run. Traders adopt a “Buy & sell” approach.

Short term price fluctuations are caused by the variations in the demand and supply of a particular asset. So, traders generally rely on Technical Analysis, a form of marketing analysis that attempts to predict short-term price fluctuations using graphs, charts and oscillators.


A speculator is nothing but a man who makes his living out of hope.

I don’t think I should explain it in more detail.

Benjamin Graham the author of classic books Security Analysis and The Intelligent Investor is regarded as the father of financial analysis. Graham’s key insight is the premise that “investment is most successful when it is most businesslike. An investment operation is one which, upon thorough analysis, promises safety of principal and a satisfactory return. Operations not meeting these requirements are speculative”- (Benjamin Graham, security analysis,1951)

Now, at this point of time, It is unnecessary to start a complex discussion about investing, trading and saving. What is important is to understand that investing; trading and speculation are three different things.

How To Build Wealth Over Time?

How to build wealth over time

‘Building wealth’ is a topic that’s searched by millions of people. Thumb rules to build wealth tries to summarize all the concepts that were discussed earlier, in a different format.

Two Steps:

Basically, The entire process of building wealth boils down to just two steps:

  • The first step is to control your expenses according to your income and make a surplus out of it. It demands a lot of financial discipline to achieve this step. Many financial principles that would help you to save money were discussed in our first sessions.
  • The second step would be to find assets that have the potential to grown in value and invest your money in it.That’s it.

The first step is completely under your control and no one can help you out. You have to work hard, get a job , make a steady income and save some money for yourself. The earlier you start saving, the better it is.

Once you start earning, it’s natural for anyone to think about availing loans to realise their dreams –for example a big car. The bad news is that, more debts prevent you from saving more at the initial years. All successful investors have accumulated more money in their initial years. Early investing has many advantages as we have already explained in one of our previous posts.

Hence, the second step is to gain some basic financial knowledge. You are supposed to know some basic rules and concepts like inflation, compounding, opportunity cost, a bit of taxation and accounting. Learning the basic money magic will dramatically alter your view about finances and investing

The third step – investing, is the one where you will have to consider a lot of things. You’ll have to draw up a plan, list out your financial goals, assess your risk profile, seek the help of experts for valuation of different assets, assess the pros and cons of each type of asset and finally choose the best investment style and vehicle.

In this, drawing a plan and listing out your financial goals with some accuracy is the initial step. Clear cut and realistic financial goals have to be drawn. The most important factor that would help you to bring in realism into your plans would be your level of savings. You can’t draw up big plans if you expect to save only little.

Once you have drawn you plans, you can look for avenues to invest. Here, the best lesson you can get is from Warren Buffet, one of the richest stock investor. He never invested in businesses which he couldn’t understand. His advice is simple “If you don’t know the business model, what the company does on a day to day basis, or how it generates revenue now, and in the future, then it’s better to stay away from it”. This principle can be applied to all types of investing. You have to make sure that you understand the basics. This advice assumes significance because; investors have a tendency to follow what the crowd is doing. If a particular stock is doing well at the bourses, investors jump in and put money without bothering to analyse what business the company is into. In short, you have to be through with the basics.

Diversification is the next area to be addressed. Diversification of money into different asset classes is required since you cannot predict the movement of asset prices and you cannot say which asset would perform best in a year. So, must have some money in all possible asset types. That’s what diversification is all about.

When you have a mix of assets in your kitty, what you have is a portfolio. Your portfolio will have to be periodically checked, reviewed and re-balanced since the value of assets with you will keep changing from time to time. For example- you have a portfolio in which 60% of the funds are in large caps and balance in mid caps. That year, if the equities go up by 30% and the mid caps fall by 2%, it will imbalance your portfolio and to make it back to that 60:40 levels, you will have to sell large caps that went up and buy mid caps that came down.

All the principles put together, you should be able to make a good return from your money. The thumb rules are:

Rule 1: Make money

Rule 2: Learn the basics of Investments

Rule 3: Identify the assets to Invest

Rule 4: Diversify

Rule 5: Review your Portfolio

Should You Borrow Money For Your Investments?

Should You Borrow Money To Invest?

You know that stocks have returned an average of 17 to 18%. So you borrow some money at 9% interest and invest that amount in stocks. Until you realize the profit, you’ll pay interest or EMI from your pocket.Anyway you look at it, it’s going to be profitable. How about that? If you are planning to do something like that – you’re at the right time reading this article. Calculations on paper may show that it is practical. But in real life, such strategies are extremely risky. We advice not to leverage (that’s the financial term for using borrowed funds) your investments in any form. It’ not a good idea at all. There are three perils waiting for you when you leverage:

  • It multiplies your risk.
  • Even when the value of your holdings go down, you have to pay your loan installments. The effective cost you pay is very high.
  • There will not be any peace of mind. Guaranteed!

How Do Investors Leverage?

There are different ways:-
  • Take a personal loan or pledge you home or property or gold.
  • Borrowed funds from others like friends. The attraction here is that, it normally comes interest free.
  • Using borrowing facilities at the brokerage firm.
  • Short sell the stock. It is same as selling what you don’t have. Hence effectively, you are borrowing shares from someone and selling it.
  • Take the derivatives route ( futures and options)

The first two options need not be explained .It’s straight, simple and needless to say, totally dangerous. In the first case, If you could not pay back the money, your lose your home. In the second case, you’ll lose your friends and may also have a difficult time facing them. It might also put your friends in trouble. So stay away from such tactics.

The other three points need some explanation. Brokerage firms allow you to borrow money from their account based on the current total holding you have in your demat account maintained with them. What they do is very simple. They will take pledge of all your share holdings and give you a loan which would be a percentage calculated on the market value of the holdings. In case you couldn’t pay back the money to the broker, they will immediately sell off those shares in the market and realize the amount. At the time of signing the agreement itself, such clauses are already built into the agreement. The interest charged for this kind of temporary funds is also very high and it’s calculated on a day to day basis.

You can adopt this way of leverage when you do it for a very temporary purpose. For example – you were eyeing a particular stock and that stock is now at the price where you want to enter. You have money in your bank, but you’re travelling and not in a position to transfer it now. You can use money from your broker and pay it back in two days.

Another way to leverage is short selling. When you short sell a stock, you are selling stocks which you do not own. What you are effectively doing is, you borrow shares (instead of money) from the brokerage firm and when the price falls, will buy it gain and give it back to the broker. Short selling is a dangerous method to make money. What will you do if your calculations go wrong? You will have to pay more money and buy back the shares from the market and return it to your broker.

Through derivatives, you leverage in a different way. For a small sum (called margin money / premium) you can take big positions in the markets. It’s like playing a Rs 100,000 game with just Rs 10,000 in hand. The risk in such cases is very high. It has the potential to wipe off all your money. Derivatives are the favorites of speculators, although these instruments are basically meant for managing risk.

In short, if you ask us whether you should borrow funds, our suggestion is:

  • No, if you’re just a beginner or amateur.
  • No, if you don’t have any other sources of income to suddenly raise funds if calculations go out of control.
  • No, if you do not have an alternate plan to pay off these debts.
  • Yes, if you can get some funds totally interest free for a long period of time
  • Yes, if you are a very seasoned investor and you know with some certainty how the markets will move.
  • Yes, if you want to utilize a sudden surprise opportunity.
  • Yes, if you have fully understood the risk and the financial destruction it can bring, but still, you’re the daredevil type – ready to face anything.

Borrowing To Buy Other Assets

If you can get loan funds at a lower rate of interest (NRIs can get it , say at 4%) you can bring that funds to India and invest here in debt funds or NCDs that give as high as 13% per annum in return or they buy gold or just put it in fixed deposit with banks. Anyway , that’s not going to be a loss.

One factor that needs to be considered while buying assets with borrowed funds is that the loan to asset value should be preferably be kept at around 60%. That is, to buy an asset worth 10 lakhs, it good to borrow up to 6 lakhs and pay the balance in cash.

And remember, cars and electronic gadgets are not assets hence, relying on loans to buy such things Involves great loss.Such loans carry high rate of interest and these items depreciate heavily with time.


Investing with borrowed funds is not recommended, except in very special circumstances. It is a very risky and aggressive strategy and should be used with a lot of caution.

Investing or Gambling? How Do You Approach Investing?

Investing or Gambling: How do you approach Investing?

The first question before investing in any asset is – Have you learnt the basics?

Do you know the rules of valuation and decision making? Do you know the potential of that asset and the risk you’re taking? If you have committed money to something which you don’t know, realise that you are gambling. When you do a lot of research and put your money in assets that would make you rich after a long time, you’re investing. Investing is a good thing to do. That’s a positive step. The odds to win are in your favor. On the other hand, when you gamble, you’re putting your money in something which is considered to be a ‘hot asset’. It may give you gains. But, the risk you take is very high. In most cases, such assets would be in an overvalued state and you might end up buying at higher rates. In short, odds-to-win are not in your favor.

Some other positive aspects of investing are that

  • It’s done with specific goals in mind –for e.g.-buying a home.
  • It’s a continuous effort. You put in your money not once but several times after a lot of study and effort and wait for thing to be favorable to you.
  • It’s a long process and results are achieved after a lot of hard work and analysis. It’s not by luck.
  • Investors achieve their targets by taking risks, positively. They take risks in a very calculated way.

As opposed to all this, gambling or speculation is not done with specific long term objectives. Money is put into any asset recklessly without analysis. They rely on luck and if they win they get what they desire-an instant gratification. This negative aspect of gambling can sometimes become addictive too. This is not to say that investing is not addictive. Surely it is. Warren buffet and our own Rakesh Jhunjhunwala are definitely investment addicts. Getting addicted to something positive is a good thing. It has no side effects! But, gambling is definitely a problem to be rectified. It has many side effects. People lose millions, wealth of families has been wiped out, and many have ended their lives due to loss from gambling. I know many stock market players who jump into F& Os even without knowing what they really are or the dangers it can bring.

A lot of so-called investors do not research meticulously and buy on tips or rumors, or based on some analyst’s price target. These guys can also be included in gamblers list. Similarly, investors who make investment decisions purely on the basis of emotions rather than being professional and sticking with their strategy, are to some extent gambling.

Entertainment or Serious Business?

Internet has revolutionized the way we buy and sell stocks in the market. With internet, trading is done at the comfort of your home. However, such advancement has also made some section of people addicted to online trading as a form of entertainment. They just have fun playing in the market. While making friends from investing circle, make sure that your friends are serious investors! Or else, it’s not god for your investing future. Hope you’re clear!