Investing in shares -watch your step!

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Indian investors are gradually taking a bold step towards the equity market. But horror stories of huge losses and a falling market generally keeps them away. However investing in equity need not be a scary idea. Keeping in mind its long term nature and understanding a few tactics, you can avoid burning your fingers in it.

 

 

Several people who have incurred losses in the market have had so because they may have invested in shares which could have been avoided. Hence, we at Fpguru.com would like to bring to your notice a few kinds of shares we believe you must avoid. Keep away from these and you are good to go.

 

Shares of unlisted companies:

 

Unlisted shares are often called over the counter shares as these are literally traded over the counter. These companies are not listed in the stock exchange and hence there is no formal market for the buying and selling of these shares. These are traded through a dealer and hence do not have an active watch dog protecting the buyers.

 

Companies that have not been listed in the stock exchange are mainly so because they either do not meet the listing requirement or they choose not to. Once they are not under the control of the exchange, they do not have to follow the strict rules and meet any minimum standards.

 

Trading in unlisted shares can also pose liquidity problems for the buyer. Since there is no formal market for these shares, selling them can become a problem, one which is not so prevalent in the stock exchange. Owing to the lack of buyers, the price of these stocks can plummet to the floor, thereby making these shares worthless.

 

A simple way to know if the share is listed is by noticing if it has a quotation in the exchange or not.

 

Inactively traded shares:

 

Some shares, though listed on the stock exchange may prove to be very illiquid. These are shares which are inactively traded on the floor, namely called cabinet securities.

 

Cabinet securities are those which are not traded every often and not in large quantities. They are issued in batches of 5 or 10 and then kept away ‘in the cabinet’ till needed. These shares become difficult to sell and hence can pose liquidity problems to an investor.

 

Cabinet securities are also risky as their prices tend to be very volatile. A slight buy and sale can lead to a steep fall or rise in its price.

 

One way to identify these shares are to notice the number of times they have been traded in the fast few weeks and also the lot size in which they are issued. These should give you a fair idea of the properties of the share.

 

Manipulated shares:

 

In today’s world, manipulation of shares seems to be a common method used by companies to attract more investors. Window dressing, as it can be called means enhancing a company’s profit statements or artificially jumping the share prices in order to attract attention and a larger pool of investors.

 

These shares can be identified by keeping a close track of the share you are looking to buy, and noticing its price change and the activities which could be leading to such price change.

 

A sudden high jump, not accompanied by any management decision or company activity, could be an indicator of manipulation.

Such shares should generally be stayed away from.

 

Cornered shares:

 

Cornering of shares refers to when an individual or a group owns most of the shares of a company.

 

This leads to a situation wherein there is a lack of supply, hence the prices rise, giving the holders a hefty profit. This sounds like a great scheme to trick the market, however if the shareholder isn’t able to sell the shares and cash his profits in time, he might get stuck owning a company which might not be profitable.

 

Hence, cornering shares is a definite no-no for anyone trying to invest keeping in mind the long run and his various life goals.

 

Keeping in mind the above tricks, and straying far away from these said shares, you can invest in direct equity without being headed for a disaster. However, it’s a must to know that these shares are not ‘bad’ but just ‘risky’ and so if you do not possess much of a risk taking ability, or if you are investing keeping in view a certain life goal, you should not tread anywhere close to them.

 

Be aware, invest wisely and live tension free.

 

By Shalmali Kulkarni.

The writer is working as a para-planner with Fpguru.com

 

 

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