Important Lessons for Long Term Investment

If an investor Plans for the long term investment, which factors need to consider?

 

Long-term investment and intraday delivery are the major types of investments made in the stock market. If an investor bought a stock and holds that stock for a week or month or year considers it a long-term investment. Coming to the intraday delivery buying stock and selling of stock happens the same day. If you purchased a stock you need to square off that before the market closes.

What are the benefits of long term investment?

Investment return

When we invest in stocks we are mainly looking for capital appreciation. If you purchase a stock at 100 we are expecting that should increase. If you hold for a particular period we get more profit from that stock. When the company performed very well eventually the price of the stock also get increases which help the investor to get more return from the investment from that stock.

Dividends

If you purchase the stock of a particular company and hold it for long period. This leads to getting dividends from that company. Dividends are considered a portion of the profit that sharing with the shareholders.

How to select a stock

Before selecting a stock we need to do some analysis, from that analysis we will get to know which share we need to invest. There are two main analyses we can focus on fundamental analysis and technical analysis.

Fundamental analysis of stocks

Fundamental analysis helps you to understand what stock need to buy. Fundamental analysis is divided into two parts

• Quantitative analysis
• Qualitative analysis

Fundamental analysis helps you to derive an intrinsic value of the company. If the price of the stock is below the intrinsic value then buy the stock and if the price of the stock is above the intrinsic value then sell the stock.

Fundamental that can be quantified come under the quantitative analysis. A few examples are assets of company, liabilities of the company, revenue earnings, ratios including P/E ratio, PB ratio, etc. cash flow statements. These all factors will consider when we do a quantitative analysis under fundamental analysis

When we need to consider qualitative analysis fundaments which can’t be qualified come under qualitative analysis, examples are technology changes, economic moat, management changes, etc. are coming under qualitative analysis under fundamental analysis

Technical analysis

Technical analysis is a method that helps an investor to identify when to purchase the stock.  Fundamental analysis helps you what stock need to purchase and technical analysis help when to purchase the stock.

It may help to understand the entry and exit points of a stock price, there are different ways to do the technical analysis.

A few examples of technical analysis include Pattern analysis, charts, and candlesticks widely used in the analysis of the shares.

What determines the price of a stock?

Fundamental reason

In this, if a company formed well the demand for the stock price of the company might increase and that leads to increases in the price of the stock. If the performance of a company is not reached the expected, demand for the share might reduce and that leads to decreases in the price of the stock.

Market sentiments

The price of the stock varies depending on the news published about the company. If you consider a pharmacy company they are coming up with new medicine for a decrease and they have announced that in the news that leads to a demand for the particular stock.

An investor may think that if they got succeeded in testing the share value the price might increase so the demand for particular stock gets increased. If that company failed in the medical testing that leads to a negative for the company and investors will sell the stocks which lead to decreased demand so the price of the stock gets reduced.

How to purchase the stocks

When an investor did all analysis the next step is to purchase the stocks. Suppose an investor plans to purchase 1000 shares, an investor placed an order through a share broker like Zerodha and up stock. Then the algorithm matches the requirements and gets those shares from a seller and transfers them to your account. Investors may get these shares from a single seller or multiple sellers.

If a seller placed an order for selling 1000 shares at the price of 100 and the investor placed an order to buy 1000 shares at the price of 100 you will get all the shares from that seller, sometimes you may get shares like 500 from one seller 200 from another seller 300 from another seller and collectively all these shares transferred to the investor Demat account. Transaction of these shares won’t be done in a single day it will have the T+2 day to get reflected in your account.

If you purchase a stock by today it’s known as the transaction date and from this date to 2 days will take to for the settlement. T+2 days are the normal transaction for the shares from one account to another.

Return on investment

Once you purchased a share of a particular company and hold it for some particular period and the investor sold those shares at a certain profit. How to calculate the rate of return for that stock.

There are a few methods are to measure the return from that particular stock.

• Absolute return

Formula for absolute return ((Current stock value- purchased stock value)/ purchased stock value)* 100

In this formula we are not considering the period in which he holds the shares, so we can’t completely say it’s 100 % accurate.

By avoiding these we can consider the second method which is called CAGR

• CAGR (Compounded annual growth rate)

CAGR formula = ((Selling price/buying price) ^{1/no.of years} – 1) * 100

Here the years of the holding period come into consideration. So these will give you the exact return on investment for a particular stock