What Should You Consider Before Investing In IndexWhat Should You Consider Before Investing In Index

Investing is easy but to invest successfully, that can get really tricky. Many retail investors lose money every year simply because they didn't know how and where to invest their hard-earned money. This lack of knowledge usually happens because they do not have the time and resources to conduct an in-depth analysis if the stocks. And whatever little research, they do is not enough to quadruple their money. You can just rely on the total return indices of stocks to see where you'll find your money's worth. However, you do not have to spend all your time in research, digging through all the financial terms and measures. Below are the few factors you should limit your research to for successful investment in stocks.

Knowledge of the company

This is intuitive. Before investing in any company, it is highly essential to know what they do. You should have an exhaustive knowledge about the company especially if you are looking to invest long term. This will help you know whether this company is heading for growth or downfall. And you do not want to buy shares of a company if it's going down the drain.

Price/Earnings Ratio

P/E ratio is calculated by dividing the current market price to the earning of last 4 quarters per share. This can help you find out how much an investor is willing to pay for Rs. 1 worth of earning. If the ratio is high, it means that the company is expensive but has a better reason for it. If the ratio is lower but the company is growing, the stock is worth watching.

Beta

The term may sound complicated but is not. Beta tells you how much will your stock price move compared to the movements in market. Higher beta stocks (i.e. greater than 1) are high return stocks but come with higher risk. This means that if market increases/decreases by 50% market, the stock will increase/decrease by more than that. High beta stocks have to be watched more carefully are good for short term gains. In lower beta stocks, your money is safe but will not earn much in short term.

Dividends

If you can't watch the market, watch the dividends. It's like an interest earned on savings accounts, you get paid regardless of the stock price. Before purchasing the stock, look for their dividend rate. If you want to park your money, invest where you get high dividends. You can even build a portfolio where you can replicate a Dividend Index. The index usually contains of stocks which pay dividends higher than expected.

News/Popularity

News can affect the expectations of people from the stocks which further decide the stock prices. Many big company stocks are always in the news and the prices are inflated by the news hype created. Avoid stocks which are in the news too much, the stocks which aren't much in news will be much smoother sailing.

The key point to remember is to invest smartly. Do not reply on the opinions of others and do your own research with the resources available. Remember these above factors and choose wisely.

by Jill M. Clevenger
References and Bibliography
The author is a financial expert and a blogger. His idea of fun is to calculate different total return indices and badminton. He would like to explore his knowledge on Dividend Index Funds and the art of skydiving.
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