How beginners and small investors should proceed in places beyond the bank
In the words of William Shakespeare, there is nothing either or good or bad but thinking makes it so. The same holds true for investing in equities. While for some, equity-investment is like the touch-me-not flower; for others, it is a way of life, a second genuine source of income, and an alternative path to wealth creation. I write this especially for beginners and small investors, with the latter objectives in mind. With years of experience, I believe that playing with the stock market is only for the conscious and daring; people who have adequate sportsmanship abilities and enough time to devote to the same. Otherwise, for the sensitive and weak-hearted, it is like playing with fire, for a casual approach to the market seldom pays. Someone who can really enjoy and survive in it, with all its ups, downs, and resulting impacts may end up being the man of the ring! Therefore, one may safely expect returns better than investing in a fixed deposit in a bank.
What to buy!
This is probably the most crucial question while entering the stock market. It is not easy to guarantee if a particular stock will perform well. Investing in stocks requires more than simple intuition; rather, it entails minute judgement.
They say there is always a slip between the cup and the lip as far as the stock market is concerned. It is difficult to define fool-proof, critical conditions for buying stock, because one never knows if it will stay promising. In other words, to understand and pinpoint a pertinent single criterion for stock selection is an impossible task. One must sift through a basket of concerned. Let me highlight some of these, as a way forward for selecting a promising stock.
I must begin by confessing that I am neither an economist nor a chartered accountant. I am simply an amateur player, investing in the market as a hobby, and wishing to share my own experiences to give others who may be similarly inclined a little beginning push in the right direction. Therefore, I believe I must make it clear that whatever little I know, I have learnt by myself, and whatever I share here is my humble attempt to benefit beginners and small investors. Based on my experiences, I shall pinpoint certain criteria, a combination of which I deploy myself for stock-picking.
The Management of a Company: A promoter or CEO’s credibility, reliability and reputation ought to be the primary consideration, aided by the fact how investor-friendly they are. For instance, Tata’s ‘fulfil-all’ and similar such criteria and are known to be most investor-friendly. These companies may remain underdogs for a while, but they come round steadily.
There are several other great performers like Reliance, Mahindra, Bajaj and Adani who fit well into these criteria. A befitting proof of this hypothesis is the scintillating performance of IDFC First Bank, and Tata Sons Companies, because of the credibility and recognition of their new leaders, who are known as great performers and are growing with every passing day.
The Business: The product line of a company and its futuristic plans and growth prospects are the key to dependability and enthusiasm for investing. For example, these days, digitisation is the watch word, followed by IT. Therefore, any investment in futuristic stocks may hold good for a few years. Likewise, the pharma and financial sectors, including banking, are currently the flavour of the market. The new sunrise sectors like gas, digitisation and non-conventional energy sources should also receive priority in stock picking.
The Liquidity and Delivery of a Stock: High degree of liquidity of a stock ensures its easy disposal at will. The daily volume of a stock also symbolises greater interest of investors in the stock. Likewise, a high delivery percentage of a stock suggests that investors are showing a keen interest in the stock from a positional perspective.
Policy Framework: Government policy for a particular sector and/ or announcement of a company’s new and futuristic plan exhibit direct impact on stock valuations.
The Dividend Yield: I personally give lot of importance to the dividend yield of a stock since this is the most evident/visible reflection of the ‘health’ of a company, and a direct benefit to the investor even though he may tax the dividend. However, it is still a better bargain.
The Book Value of a Stock: This is another indication of the health of a company, and the fair price of a stock.
The day-to-day price movement of a stock coupled with the sustained positive/rising trend.
The CAGR of a company.
Price to Earnings Ratio or P/E Ratio: PE refers to the ratio of the company’s share price to its earnings per share. The ratio helps to understand whether the Company is undervalued or overvalued. Though a very important parameter for technical details, but a beginner may feel free to skip ahead.
Traders’ Favourite Stock: This could be a significant pointer for identifying a promising stock! By basic analysis, if rightly judged, it may prove helpful.
Of course, while all these parameters are very important, the first five should be prioritised in order to come to a fair decision.
Nevertheless, investing in equities through future and options is a different ball game that requires a different skill set, and is, thus, relatively risky. Therefore, a beginner and a small investor should avoid dealing in derivatives, i.e., in future and options (F&O), without proper understanding.
Why Invest in Equities?
I regard investing in equities as a matter of pleasure and pride, for ushering in a genuine second source of income and wealth creation by a strategic investor. The pleasure of investing in equities may be regarded akin to the pleasure of rearing a child by the parents, and rejoicing in the different stages of his growth and development in life. Accordingly, from selecting the right stock at a reasonable price to coolly watching it grow bit by bit to perhaps a multi-bagger, and getting handsome returns after a substantial period of time, is equally exciting and a matter of pleasure. Therefore, for one who wants to play safe and sure with conviction and honesty, and for creating a second line of income, investing in equities is the answer. As a thumb rule, I might add that undue hurry and greed in the stock market may prove a spoilsport, and patience often proves rewarding! One can easily hope to get an average return better than a bank FD, and quite possibly much higher returns, in long term. But there is, of course, no guarantee of any sort in this arena.
When To Buy /Invest In A Stock?
Do not rush to buy or even sell blindly on getting a tip: Take a tip, news or expert recommendation for a particular stock with a pinch of salt, and in wait-and watch-mode. This is because these tips serve as a kick for the price movement of a stock. They also directly affect your emotions and decision-making process. Blind emotional reactions are almost always harmful for your pocket. This could easily be witnessed in the swift and fast buying interests in a particular stock as a result of news or a recommendation on your TV screen, and subsiding soon after, the same day or next day. Thus, if one is not vigilant, it may prove a trap. A wise thing would be to observe and understand the worth of a tip before execution.
Buy when a mass of players is dying to sell: This is probably one of the most tried and tested factors that impact the buying-behaviour of people. One very strong and evident proof of the validity of this hypothesis may be seen in the market trend during the Covid-19 pandemic. Players who invested during the early stages of the pandemic, in contrast to those who rushed to sell their stocks assuming that the market was heading towards doomsday, are minting money in 2021. Mind you, stock markets are not for a day or two, but for the ages. So, it is wise to grab an opportunity during every dip, and especially so when the same is major or prolonged. This opportunity should also be used wisely to churn your portfolio.
Buy a stock after its crazy rise subsides: Often after a powerful IPO or news or corporate action such as is witnessed these days regarding disinvestment news on PSUs, there take place sharp swings in the price of a particular stock. In such a situation, many people see this as an opportunity to buy the stock, but the truth is otherwise. Indeed, here a thumb rule ought to be to sell on the sharp rise, and buy on the sharp dip of the price of the stock, simply for better gains.
Buy your chosen stock in a staggered manner, i.e., in smaller lots.
Buying as a parking lot: A parking lot of shares is a term coined by myself, for my interest in buying a stock which is laggard and of limited volatility, of low to medium price but with high dividend yield, and occasionally news driven. But for these points, in fact, most listed stocks are fundamentally strong. The purpose of having a parking lot of stocks is to sell these at any time, at par or even with a minor loss, and in favour of a valued stock which ought to be in my long-term portfolio. The basic idea is just to momentarily fix up an amount for buying a valued stock at the first opportunity.
Some of the stocks I consider under this are SJVN, NHPC, Nalco, BHEL, RVNL, NTPC, PTC, PFS, South Indian Bank, Karnataka Bank, NBCC, MRPL, Titagarh Wagons etc.
If you like this concept, you may create your own short-term lot, depending upon your understanding and judgement!
In conclusion, I would like to state: don’t gamble with equities. Play them with leisure and pleasure slowly as a winner. Don’t regret it if you lose an opportunity, but coolly wait to lap it up again – in a beneficial manner, of course! Opportunity in the stock market is like a homing pigeon: it will (or at least ought to!) to return. Never try to time the market. And, as a beginner, avoid dealing in futures and options: while the returns are tempting, losses may be unbearable.
The author is a blogger and former employer with the Government of India
DISCLAIMER: Views expressed are the author's own, and Outlook Money does not necessarily subscribe to them. Outlook Money shall not be responsible for any damage caused to any person/organisation directly or indirectly.