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Thursday, January 27, 2011

Are you Investing in Stocks for Quick Returns?

Did you buy a stock to turn Rs. 1,00,000 into the Rs. 3,00,000 you need to purchase your 4-wheeler next year?

If so, you’re not investing, you’re gambling, and, unless you are incredibly lucky, you will not meet your goal.

The expectation of a high return in a short time frame is not realistic. Do stocks every shoot up like rockets?

Yes, some do. However, you must understand that the market works on a rigid risk-reward basis. If there is little risk to the investor, there will be a lower potential reward.

Investments that offer an extremely high potential reward invariably come with a high level of risk.

For the investor, this means if you are after the big returns, you must be prepared to suffer more losses than rewards.

As an investment choice, stocks have historically returned 10 to 12 percent. Does that mean that every stock should return in that range?

Not at all – that is simply an average. You need to assess the risk of investing in a particular stock before deciding what an acceptable return is.

An investment in a young high tech company should have a higher potential payout than putting your money in a “blue chip” company that posts modest growth and pays a regular dividend.

What would be the risk factor for a stock that could potentially triple in price over a short period? The answer is very high – in fact, so high that the odds of it succeeding would be very slim.

There is no safe (or legal) way to earn a very high return on your money over a short period.

Investing in stocks is best done as a long-term effort, which allows your money to grow and permits time for course corrections and adjustments.