Let's start by discussing the fundamental principle: Investing in equities means owning a business.

Let us go into the details of this principle. When you deposit money in a bank, you take a risk (could be a small risk, depending on the bank you put your money). The bank in return pays you a small interest. The banks take a greater risk when they lend that money at a higher interest rate to businesses or persons. They pay your interest out of the money they earn from these loans. When you purchase shares in a company, you provide capital for the company. In other words, you are becoming part-owner of the company. You are taking a greater risk because, in this case, you have entrusted the company with the job of managing risk on your behalf.

The risk in depositing (lending) money in a bank is considered to be less because most of our banks are nationalized and the deposits in these banks are considered to be backed by the government. There is a sense of security when you deposit your money a nationalized bank, purely on safety reasons. Naturally, when you invest in equities, even this notional sense of security of the government protecting your money is not available to you.

What kind of business would you invest in?

Assuming you want to invest your money into a business, let’s look at this from another angle. How to decide what kind of business to invest?

First of all, it should have the potential to earn a return that is more than what the bank interest offer. Now it is necessary to ask yourself what the essential factors are for determining this return. In addition to the return angle, the other qualitative factors that one look for is security. The ideal business would have to have horizons where profits can be sustained. Other external factors determine the direction and growth of the business. This should have been factored into its business plan that would help it sustain and grow over some time. Operations of the business must be evaluated from market feedback, along with the financial statements, that will give an idea of the profitability of the business.

When we own shares in a company, the same concepts apply. The annual report of the company is the most basic source for information available on a company's operations. We find in the annual reports, the explanations by the directors about the nature of operations, and how the external environment surrounding the business affected the company during the year. By taking a bit of additional effort, you can find out how the products of the company are positioned in the market. This would give you a fair idea about the reputation of the company in the field it operates. This is done to figure out the company's operational stability. The progress of the company can also be tracked periodically over intervals of three months. The regulators have made the publication of these quarterly financial statements mandatory.

Wondering how you can control a business where you have no say in the management?

Assuming you are running your own business, can you as an individual handle all its functions? You may be able to do it for a while. But as the company grows, it would not be possible to manage all its functions such as marketing, finance, purchase, etc. This is the time when the various functions of your business organization to be delegated to qualified individuals.

In the same way as a shareholder, you are delegating authority to the others to run the business you have a stake, and they are answerable to you and other shareholders of the company. The management communicates with you through the annual report, balance sheet, and the annual general meeting where shareholders voice their opinion on the performance of the company. As you have become a joint owner of the company whose shares you have bought, you can as a shareholder participate in constructive criticism of the operations of the company.

But you don’t have to worry about which company to invest in when you have, Sharekhan as your guide. The fundamental research team of Sharekhan works day and night to identify profitable investment ideas for investors. Sharekhan Stock Ideas are fundamentally sound companies with bright business prospects and you can choose from them.