Riding the Stock Markets
Stay invested for the long run to get the most out of your investments and don’t be distracted by short-term blips
Curiosity gains over rationality every time the Sensex hits a high. The outcome—several people who have never seen a stock ticker start showing interest in investing in stocks. However, the moment they start working towards their first investment, the information overload is not just overwhelming, it is also quite confusing. “We want new investors to understand stock investments and help them by providing a platform that is easy to use and understand,” says Shilpa Kumar, MD and CEO, ICICI Securities.
For investors looking to invest in stock markets, the best way to start is to understand the basics correctly before taking a plunge. “I started investing in stocks through my online brokerage in 2015. The information on the site is useful, but I also supplement the same by reading up a lot online and on offline resources,” says Puneet Vinod Kumar, 35. In about two years since he started investing, Kumar has invested in IPOs, select stocks and even long term bonds, because he felt these investments work for him and fit into his financial goals.
Are stocks for you?
Although the primary driver to invest in equities stems (for most investors) from tracking the stock market indices, direct investing in stocks is not for everyone. The primary reason being—it takes a lot of money to have meaningful investment and it also calls for a lot of time to be spent by the investor in managing their investments. “Stock returns are impressive over the long-term, as short term fluctuations can be pretty unnerving for a new investor,” says Jiju Vidyadharan, senior director – Funds and Fixed Income Research, CRISIL.
One rule which will define successful investors: understand and accept that share prices fluctuate, but as a long-term investor, ignore these fluctuations to have a better outcome with your investments. Also, direct investing in stocks works best when done for the long term. “I analyse the stocks and management before investing, with a view to stay invested for the long-term,” adds Kumar.
Building a framework
“Every investor needs to have a clear benchmark and view their investment portfolio against this benchmark,” advices R Sreesankar, co-head – Equities, Prabhudas Lilladher. True, without a benchmark there will be no clear method to evaluate the performance of an investment. For instance, investing in Hindustan Unilever Ltd. will be best judged against the benchmark FMCG index or its peers like P&G, Marico and ITC, among others. Eventually, however, regular investors figure out some system which they swear by because it works for them.
Fundamentally, stocks represent shares of businesses. It would be in your interest to learn how businesses work to make money out of investing. “Rely on authentic research, go for a diversified portfolio and focus on long term investing,” suggests Shilpa Kumar. Most online broking sites have plenty of research data and active portfolios that one could take cues from before making their own investments in stocks.
Do familiarise yourself with basic evaluation tools and rations. “Understanding PE ratio of the stock is very important before investing in them,” swears Mumbai-based Haresh Patel. At 44, Patel is an active trader, who also places bets with a long-term view. Sadly, the realisation that one needs to understand stock evaluation seeps in only after an investor generally burns his fingers by losing money. “I lost out by investing in ONGC before the stock split, because I missed on the news about the split. I learnt the lesson to keep up-to-date with my investments,” recounts Kumar. In case of stock splits, the share price falls before finding a new base.
Investing in stocks is all about opportunities. If one looks deeply, there is tremendous opportunity when investing directly in stocks. What you need to internalise is that long-term investing is akin to owning a business, which can make profits for its shareholders. When investing, look at the company and not the stock in isolation, which means you need to understand how the business will profit and how it can be sticky and fairly visible.
Having simple yardsticks like the return on capital, return on investment, growth sales and increase in profits, are parameters that can help you arrive at the intrinsic value to the shares of a company. “Once you have zeroed down on a company using these yardsticks, next task will be to decide the price you will be willing to pay for it, which will be based on the intrinsic value of the shares of this company. Intrinsic value reflects the true worth of the business over time,” suggests, Rahul Jain, head – Retail Advisory, Edelweiss Wealth Management.
If you are not adept with investing directly in stocks or don’t have the time for it, you should consider investments in mutual funds and ETFs. “Busy people can look at ETFs or portfolio services that help them invest better,” suggests Kumar. The advice could not have been better, considering that we are in the middle of a sweeping bull run through the markets, which has created unprecedented wealth over the past few months. Do invest in stocks directly, but only if you have the time for it.