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Know Why Do People Buy Shares

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 financial advisor.

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