1.Discovering your Style:
a.Risk Appetite:
The first step to discover an investor’s investment style is to analyse itsrisk tolerance. An investment risk in simple terms is the probability of making a loss due to the variability in the market price of the stock. An investor should have a realistic understanding of its ability and willingness to the handle the price fluctuation of his investment. The most common practice to gauge an investor’s risk tolerance is by using a set of questionnaires.

For example,a question might be, "What would you do if the stock market fell by 20% over the course of one year? You would (a) Do nothing, (b) Wait a few months to make a decision or (c) Sell your stocks immediately". Anaggressive investorwould most likely answer '(a)', amoderate investor'(b)' and aconservative investor'(c)'.

b.Return requirement:
After assessment of risk appetite, an investor should focus on having a clear understanding of its return requirements. The required rate of return is the minimum return that an investor expects for taking a given level of risk. When calculating the required rate of return, investors look at overall market returns, risk-free rate of return, as well as the volatility of the stock.

Higher the risk, higher will be the return requirement. For example, the government bonds are considered as the risk-free investments and hence their rate of return is say around 4% per annum. However, the riskier investments like mutual funds may provide a higher return of say 8% per annum. Hence, an investor expects a higher return to compensate for the risk that is ready to bear.

c.Age factor:
The younger an investor is, the more time and energy he/she has to recuperate the starting capital if anything goes wrong with the investments. The older one gets, the less time and energy he/she would have to do that. Hence, younger people would tend to have a larger capacity for risk than older people. In other words, younger people can afford to lose more i.e. they are less risk averse than older people due to the time they have left.

Suppose Rahul is 25-year old and has just started earning. He can invest in riskier investments like equity since he has no commitments and dependants. However, Mr. Satyam, who is 50-year old, has commitment to pay for his son’s higher studies. He plans to retire in a decade and wants a steady source of income thereafter. Hence, he may like to invest in a fixed income security.

d.Skill-set and knowledge:
There are two types of investors: active investors and passive investors. Managing an investment actively involves a certain skill set and adequate investment knowledge. Apart from a strong interest in money management, an active investor should possess general financial market knowledge and analytical skills.Investors also need a firm grasp of financial history. The most important skill that an investor should have is emotional-discipline.

Let’s take an example of Rohit, who wants to invest in stock of ABC co. He came across a lot of researches on the internet and business reports that claim stock of ABC is set to rise 40 percent. These may warrant attention but acting immediately based on these researches is not correct. It's important for Rohit to make decision based on his own research.

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