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.