What it means to invest in equities

The past year has not been easy for the average investor. Capital markets plunged to all time low, fundamentally healthy stocks(stocks of companies having sound financial health and good business prospects)lost a significant portion of their value,mainly driven by erosion of investor confidence and triggered by negative market sentiment.

The Dubai financial market(DFM) that once rose to a high of over 8000 points has now dropped to around 1,600points and has been around this level for a few months.

Investors started focusing more on preserving their wealth rather than making more out of it. Simply put investors did not want to lose any more of their hard earned money in an attempt to make more. But one cannot remain passive for long and markets do not stagnate at their bottoms. Holding cash yield almost nothing after adjusting for inflation. And moreover, one needs to invest for the future and that is where capital markets more specifically,the equity markets play a crucial role

But what buy equities?

Equity,shares or stock all means the same thing. Equity represents a share in the ownership of a company.It represents a claim on company'sassets and earnings. The owernship stake in the company increase as one aquire more equity. when you buy a share of a company its ownership entiles you to the profits of the company in the form of dividents and other benefits.

But we should bear one thing in our mind that investment world and equity investment do come with certain degree of risks. so, before investing in equity investor has to check risk or profit.In other words if you are capable of taking risks the world of equity investments beackons you.

The next important thing is "how much to invest in equities?

The rule of the thumb is "hundred minus age". So if you are 30, you need to put 70% of your investment in equities and vice-versa. The rational behind it is simple.

Risk bearing capacity and risk tolerance comes in the young age and moreover it provides many more years to recover your fallen fortunes in case the market behaved opposed to your expections.

Another aspect of equity or investment is the way one finance it. No matter how exiciting and buoyant the stock market is you should never stretch borrowing to invest in their asset class. Investment in shares are in essence investment in business of the company and companies provide substantial returns in the long run. So, shares are long term investements that should never be financed by long term borrowing.

The trick to analyse stock for the longer term by way of fundamental analysis. Companies with healthy cash flows,substantial earning, good business prospects, growth potential sound corporate governance and enjoying investor confidence are the one to look out for.

There are various ways to analyse such companies.The popular among them are analysing the key ratios of the company.These key ratios are available in respectable stock exchange website.

The other way to analyse stock is reading charts and graphs. This approach is more directed towards understanding the short term movements that are not fundamental in nature.