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What is Investing?
The author states that we all have invested in some way or the other in our life. Yes. Investing is not just about gold and stocks; we all have invested in relationships, education, health, etc. The purpose of investing is different for different people and so are the investment products. Parikh notes that broadly, there are six investment products namely:
The other important things that one needs to know are the terminologies that are widely used in the market. For e.g, buying is often referred to as going long; selling is called going short. If one does this process of going long and short rampantly, then it’s said to be trading. An investor on the other hand saves money and buys for the long term.
Trading is not a bad thing, but one needs to understand whether he/she is trading or investing. For investors, trading creates liquidity in the market and also creates excesses, which ultimately help them to buy at bargains and sell at a good price.
Parekh states that one needs to have an investment plan. The investment plan would differ from person to person according to age, gender, size of family, goals, etc. For example, a young 25-year-old would have higher risk tolerance than a 70-year-old and hence would have more allocation towards risky assets like crypto/stocks, etc.
The author stresses that we should prepare an investment plan in order to meet our goals. For example, if your goal is to purchase a bike in 2 years, maybe stocks would be a better option as the required rate of return is higher, whereas planning for child education is a long-term goal (for a millennial) and requires assured returns as well. Therefore, safer investing tools such as FD, bonds, mutual funds, etc., should be opted for.
As stated earlier, the investment strategy of an individual keeps on changing with age and other factors; the investor can participate in trend-following assets. In this chapter itself, the author has discussed a strategy that he himself used. Let’s say you have 1000 shares of Tata Steel at 100, thereby investing 1 Lakh. Now the stock moves to 125, generating a profit of ₹25000. Now, he suggests you sell stocks worth ₹25000 and invest this amount in another stock/ asset class which is upward trending. This way, you diversify and reduce the risk of losing the entire money.
