Know Why Do People Buy Shares
Actually there are different reasons for which people buy shares. We all know that
shares are representative of ownership in a company and hence the stock over the
long term performs as good or as bad as the company itself. In the long term, equity
shares are the best value creators for your portfolio, although in the short run
they can be quite volatile.
Why are Shares Important?
Shares come in two forms viz. the primary market and the secondary market. The primary
market is the market for IPOs wherein you help a company raise finances for its
projects. The secondary market is where most of the listed stocks get traded. Here
you can buy and sell shares in the secondary market and if you take delivery of
the shares then you will get the shares in your demat account on T+2 day. Shares
are important because they represent ownership in a company and therefore they participate
in the performance of the company.
Different Reasons Why People Buy Shares
For intraday trading purposes
This is the most popular reason for buying shares and it is called trend trading
or intraday trading. Here the buyer of the share looks to close out the position
on the same day. This can be a long position or short positions. Such intraday positions
can either be closed out at a profit or at a loss. In intraday it is discipline
of stop losses and profit booking at regular intervals that really matters a lot.
For trading short term trading trends
You expect the sock to go up in the next 2-3 months. You are obviously not a very
long term investor and you are looking more at short term trends to make money.
If you expect a big order for the company, or a sharp growth in profits or a sharp
rise in the margins then you can capitalize on these trends by buying equities for
the short term. Such stocks are normally sold once the price target is met.
To bet on a long term corporate story
This kind of an investment decision is normally taken by people who are familiar
with a particular industry. For example, if a retail distributor finds that there
is sudden demand for a particular brand of noodle products, then they can buy the
stock in expectations of a major rise in price. When you get such industry insights
as a business man or as an employee of a company you can use these insights to buy
into a new trend or a long term story.
For creating a long term equity portfolio
One of the best ways to create wealth in the long run is to buy and hold equities
for the long run. That is what is called portfolio building. When you build a portfolio
you carefully select stocks to buy and then hold them for a very long period of
time. For example, stocks like Wipro, Havells and Eicher have given humongous returns
over the last 10-15 years and that is what portfolio investing is all about.
Buying shares as part of your financial plan
Normally your investment activity begins with a financial plan. Here you lay out
your long term goals and then plan backward. Normally, you buy equity for very long
term goals like retirement and child’s education and you buy bonds and debt funds
for short to medium term obligations. Ideally, this should be your starting point
and each equity investment that you make must be pegged to a specific financial
goal in the future. That is when your equity investments actually become meaningful.
Why You Should Not Buy Equities
Just as there reasons why you buy equities, there are also some reasons why you
should not buy into equities. Here are 2 of them:
Don’t buy equities at random
When it comes to equity investing, always invest with a goal in mind. A lot of investors
have the habit of just creating a portfolio at random. That is not a good idea.
First set your goals, and thenquantify the risk that you are willing to take and
finally take a view on what stocks to buy and what stocks not to buy. A methodical
approach works best in this case.
Don’t buy on tips and rumours
This is again an important point because a lot of traders and investors tend to
buy and sell shares based on SMS tips, WhatsApp forwards and other such grapevine
stories. Either these are baseless or motivated recommendations. You must always
take your buy decisions only based on research or by talking to your broker or your