Office Photo -Feb17-2009

How to invest in shares: The Smart way

INVESTING in equities is riskier than and definitely demands more time than other investments. However, it can probably be more rewarding than you can imagine and certainly very exciting! World over, and even in India, stocks have outperformed every other asset class over the long run. Stocks are probably your best bet against inflation too.

If equities tempt you but you are scared to take the plunge during these volatile times, here's a complete step-by-step guide on investing in equities.

Step 1: Understand how the stock market works

When you read you begin with A-B-C. When you sing you begin with Do-Re-Mi. And when you invest in stocks you begin with business-company-shares.

Before you embark on your journey to invest in equities, teach yourself how the stock market works. Read this easy guide .

Step 2: Learn how to choose a stock
Having understood the markets, it is important to know how to go about selecting a company, a stock and the right price. A little bit of research, some smart diversification and proper monitoring will ensure that things seldom go wrong.

It's not that difficult: Just follow these 4 golden rules. And while you are at it<>

Step 3: Decide how much to invest
Since equities are high risk, high return instruments, how much you should invest would really depend on how much risk you can tolerate. Take this quiz to find out what your risk profile is.

Once you have done that, use this asset allocation test to calculate exactly how much of your savings you should invest in equities.

Step 4: Monitor and review
Monitoring your equity investments regularly is recommended. Keep in touch with the quarterly-results announcements and update the prices on your portfolio worksheet atleast once a week. You can use Moneycontrol's Portfolio to update the prices of your equity holdings.

Also, review the reasons you earlier identified for buying a stock and check whether they are still valid or there have been significant changes in your earlier assumptions and expectations. And use an annual review process to review your exposure to equity shares within your overall asset allocation and rebalance, if necessary. Ideally, revisit the RiskAnalyser at every such review because your risk capacity and risk profile could have undergone a change over a 12-month period.

Finally, ensure that you avoid these seven most common investing mistakes and sail smoothly into your financial bright future.