vicky mahesh rajdev
New member
help me in my workInvesting in equities is akin to owning a business. So what we now need to figure out is how to evaluate which company to buy. But before you get into the complexities of the various valuations tools you can use and how you calculate them, we must table a fundamental principle. When you put your money in a bank deposit, you take a risk. In return, you get paid a small interest.
The bank takes on a higher degree of risk and lends that money at a higher interest rate to some businessman, or to a credit card holder who wants to buy a diamond ring for his wife. The bank pays your interest out of the money he earns from the businessman.
Whereas, when you buy shares in a company, you are not lending money to the company. By providing capital for the company, which is represented by an equity share, you are participating in the ownership of the company. Clearly, your risk is much greater in this case. Because, in this case, you are entrusting the company with the job of managing risk for you.
Relatively, the risk in lending to a bank is limited. For one, most of our neighborhood banks are nationalized. So bank deposits are perceived to be backed by the government. There is little soul searching to be done as to which bank to choose. Even in doing so, the highest priority is accorded to a Nationalized Bank purely on the safety parameter. Obviously, when you invest in equities, even this notional sense of security, of a government standing guard over your money, isn’t available to you. Let’s assume you want to invest your money into a business. How will you decide what kind of business to enter? For starters, it should display the potential to earn you a return in excess of what the prevailing rate of bank interest is, right. Now you need to ask yourself what would be the essential factors in determining this return.
In the long term, we all look for security. Business, being an entity, is also entitled to aspire for the same. The ideal business would thus have to have horizons w
The bank takes on a higher degree of risk and lends that money at a higher interest rate to some businessman, or to a credit card holder who wants to buy a diamond ring for his wife. The bank pays your interest out of the money he earns from the businessman.
Whereas, when you buy shares in a company, you are not lending money to the company. By providing capital for the company, which is represented by an equity share, you are participating in the ownership of the company. Clearly, your risk is much greater in this case. Because, in this case, you are entrusting the company with the job of managing risk for you.
Relatively, the risk in lending to a bank is limited. For one, most of our neighborhood banks are nationalized. So bank deposits are perceived to be backed by the government. There is little soul searching to be done as to which bank to choose. Even in doing so, the highest priority is accorded to a Nationalized Bank purely on the safety parameter. Obviously, when you invest in equities, even this notional sense of security, of a government standing guard over your money, isn’t available to you. Let’s assume you want to invest your money into a business. How will you decide what kind of business to enter? For starters, it should display the potential to earn you a return in excess of what the prevailing rate of bank interest is, right. Now you need to ask yourself what would be the essential factors in determining this return.
In the long term, we all look for security. Business, being an entity, is also entitled to aspire for the same. The ideal business would thus have to have horizons w