Informed
vs Un-Informed Investor
The informed Investors are the ones
who have good knowledge of their investment actions and set realistic
expectations from the stock market. They are well planned and they study about
the financial markets before investing in securities. They know that by investing in a
stock, they increase the overall wealth of an economy and that ownership of a
security represents the ownership of a company. Informed investors understand
that some conditions might lead to losing their money in the market. They
mainly invest considering:
Objective: The informed
investors are aware of their investment goals and they follow an intelligent
plan to gain financial security. They are mainly interested in
Periodic Income: They are mostly
retired persons with 60+ age and they look for a regular monthly income to meet
their day to day expenses.
Capital Appreciation: They are mostly
young adults in the age group of 25 to 45 years looking for growth
opportunities where they can park their monthly savings.
Capital Protection: They are mainly
middle aged persons in the 45+ age group. They look for protecting and
enhancing their savings for the future use like child education, medical
expenses etc.
Term: They come
prepared with the term they are looking for investing the money. These
investors generally discuss and plan the investments based on their short term
and long term liabilities.
Priority: These
investors prioritize their investments based on their requirements. Like an
investor might come with a 5-year investment horizon considering his
requirement of doing an Executive MBA.
Risk Appetite: These
investors are aware of the risk they can take and would normally stick to their
investment objective, term, and priorities set for the investment.
Understands the tax obligations: They
understand the capital gains and other tax impacts on their portfolio and
generally refrain from investing for short duration.
Diversification: They are
aware of the benefits of diversification and generally have a balanced
portfolio consisting of three major asset categories – stocks, bonds, and cash.
Market conditions that cause one asset category to do well often cause another
asset category to have average or poor returns. By investing in more than
one asset category, they reduce the risk of losing money.
Due diligence for various admin and
brokerage fees: They collect the brokerage and other fees data from various investment
management firms and try to negotiate the term and conditions with the broker
of their choice.
Due diligence on
companies they plan to invest: This is the most important part
and sometimes astonishes me with the thoroughness they perform the analysis of
companies they want to invest. They are well acquainted with the financial
statements and ratios of the company and try to bring the management
discussions on table before making the choice of investing in a company.
Keep abreast with management
discussions and other updates: Their research does not end with
communicating their preferred investment choices but they also regularly go
through the management discussions and try to keep themselves updated about the
companies they have invested in or planning to invest. They follow the
company’s management decisions, future goals, performance and are quick to
rebalance their portfolios.
Are the ones who consider the stock market a gamble and their decisions
are solely based on speculation and market commentaries. These investors think
of shares as a trading vehicle and they forget that stock represents the
ownership of a company. They look for the quick gains and often panic at the
first hint of market drop.
An Un-informed investor invests:
An Un-informed investor invests:
Without proper
knowledge: Generally, the un-informed investors do not invest time in
studying about their investments. They go by hearsay about different shares in
the limelight during that period and accordingly request for the stocks to be
considered as part of their portfolio.
With no time horizon: They go by market
speculations and follow a very short term horizons. They think of investing
when the market touches peak and they panic and wish to sell their entire
portfolio sometimes at the first hint of share price fall or when the market
prices hit low. They generally are not patient enough to listen to an expert’s
advice and wait for market’s revival.
Without considering
risk: This type of retail investors generally override the risk factors
while investing in an instrument. They never consider the fact that anything
which goes up might come down as well.
Without any risk
tolerance: This type of investor is not aware of the fact that how much risk they
can bear and they continue holding the security even after the security value
has fallen by considerable amount. Same is the case when market is in the
upward direction, they keep on holding it with the hopes of getting more profit
in future.
Without Diversification: These investors are
heavily invested in one type of securities and their portfolio is generally not
diversified. I regularly face this situation while managing their portfolio, I
request them to consider mutual funds, fixed deposits, and government bonds as
part of their portfolio but they go by the assumption that investing is all
about buying shares of a company.
Invests mainly in
penny stocks: The generally pick illiquid securities/penny stocks having high risk
instead of going for the blue-chip/ index securities which are considered safe.
It is very rare an investor asked for a blue-chip stock rather they search and
request to buy the smallest value stock without considering the liquidity and
volatility associated with it.
Not aware of tax consequences: Generally, the uninformed
investors are not aware of the taxes levied on short term investments which
makes a considerable impact on their market gains.
Do not factor in the trading and
brokerage fees: The uninformed investors go by word of mouth and do not take
sufficient efforts to compare the brokerage and other costs of various
investment firms, sometime they trust their money with a dubious investor and
incur losses. The investors I get, often complain that their previous broker
has eaten up all their profits. This also shakes their belief in share market
and they become susceptible.
