Let Your Money Work Harder

By Sukumar S P *

Not many of us invest in company stocks which is one of the lucrative investment options.

Some of common man's most popular investment options are fix- term-deposits and savings accounts of banks. How much return do we get from such investments? 5% p.a. or less from savings accounts and less than 12% p. a. from fix term deposits.

Why not we invest in other options if we get less return from such investments? Let's examine. One of the high- return high-risk option for investments is investment in company stocks, both in the secondary market and IPO.

When one invest in company shares, he gets return in two ways. One in the form of annual dividend payment and the other in the form of capital appreciation. For the time being we'll concentrate on capital appreciation. Through capital appreciation your investment can become double in a matter of months.

Let us take up the example of one company stock. Say TATA MOTORS. TATA MOTORS has constantly giving average Earning Per Share of Rs.32 for the last 5 years. Suppose we want a return of at least 12% from our investment. At Rs. 32 EPS, the right price for purchase of TATAMOTORS stock is at Rs. 291 per share if one expects 12% p.a. return on his investment.

When we look up the at the TATAMOTORS share price, the correct buy price occurs on March 19, 2009. If somebody had invested at this time in TATAMOTORS stocks i.e. when the price was at around Rs.291, the person's investment value would have been Rs.783 ( Bombay Stock Exchange)per share on March 19, 2010 closing price.

The gain is 169% in percentage term. In simple words, if one investor had invested Rs. 100 000 in the month of March, 2009, his investment value could have been Rs. 269, 000 today, in a years time.

But a word of caution here is that not every stock grew at this rate. Knowing the fundamentals of the company in which you are going to invest is of vital importance.

If you know the right company at the right time, your gain could be huge. Of course there is risk in investment in stocks. But there is no gain without risk.

The question is about recognizing the risk and take only the amount of risk which one can handle, then gain will take care of itself.