The increasing stock markets have drawn a large number of investors to equities as a form of investment. Demat accounts were opened at a record 14.2 million in FY21, up from 4.9 million in FY20. Furthermore, a growing number of ordinary investors––many of whom are new to the markets and hail from Tier 2 and Tier 3 cities––are placing huge bets on the stock market. To be successful in equities investing, one must undertake their own in-depth study rather than follow the crowd. It is critical to have a plan in place since markets do not always work in your favour.
When it comes to direct stock investing, there are a few things to keep in mind:
Check the basics - When it comes to direct equity investment, having the right information and understanding is the key to success. It's important to consider the following factors while making a comprehensive decision:
Find out more about the company and its business approach.
Recognize the company's market sector, the brand value it conveys, and its market share.
Learn about the company's capital allocation, revenue and profit drivers, management, corporate governance processes, stakeholder treatment, the company's vision statement, future growth possibilities, and so on.
Because businesses do not function in a vacuum, it is also necessary to research the industry and its competitors, the local and global economic environments, and the political environment, among other things.
You should also consider certain quantitative elements in addition to these qualitative features. Price-to-Equity ratio, Price-to-Book Value ratio, Return On Capital Employed (ROCE), Return on Equity (ROE), Return on Assets (ROA), debt-to-equity ratio, dividend payment, dividend yield, estimating future cash-flows, intrinsic value, and so on are some of them.
It is critical to pay the correct price for the appropriate stocks.While it may seem that price and value are two sides of the same coin, they are not. You may be able to effectively choose stocks if you use this technique.
Spread out your investments — There may be times when markets seem to be hitting all-time highs on a daily basis. It is preferable to stagger your investments rather than investing a large amount at periods when values seem stretched. Don't make all of your investments at once. Take advantage of any intermediate market declines that may occur.
Diversify within the equity asset class - Diversification is a fundamental precept of investing that reduces concentration risk, which may have a negative impact on the performance of your portfolio. As a result, pay attention to how much of your money you distribute across market capitalization categories (large-caps, mid-caps, small-caps) and industries to avoid an unbalanced portfolio.
You might choose to invest in shares using the 'Core & Satellite' method. The phrase 'Core' refers to the portfolio's more stable, long-term assets, whilst the term 'Satellite' refers to the strategic element that would assist boost the portfolio's total returns, regardless of market conditions.
Large-cap stocks may make up a higher share of your equity portfolio's core holdings. The satellite holdings, on the other hand, may consist of a lesser part of shares from the mid-cap and small-cap domains. Core and Satellite investment combines the best of both worlds, providing both short-term high-rewarding chances and long-term consistent profits. Having said that, the amount of money you put into large-caps, mid-caps, and small-caps should ideally correspond to your risk profile, investment purpose, and time horizon.
Consider investing in overseas shares to diversify your portfolio across borders. This may help you mitigate country-specific risks while also allowing you to benefit from international investment possibilities.
Maintain optimum cash - You'll need adequate liquidity or cash to cover your routine costs and unexpected expenses. As a result, keep 'optimal cash,' which is neither too much nor too little. Maintain a sufficient amount in your savings account so that the money is readily available anytime you need it, especially for market deployment when there is a large correction and/or an appealing investment opportunity.
Review and rebalance your portfolio — Many investors make the mistake of chasing momentum in the hopes of making quick money. However, do not expect that equities markets will rise in a straight line. Volatility and corrections are a natural element of the equity market, and they can increase the risk associated with your equity investments. Furthermore, your financial circumstances, personal risk profile, attitude toward money, or investing aim may change over time. You might also choose a different investing strategy. So, among other things, analyse and rebalance your portfolio by considering the following factors:
- Total number of equities and equity-oriented mutual funds in a broad asset allocation
- The price-to-equity ratio (P/E ratio), Price-to-Book Value ratio, earnings trend (quarter-over-quarter, year-over-year), Return on Capital Employed (ROCE), and Return on Equity of stocks and/or equity-oriented mutual funds (ROE) Many quantitative components include return on assets (ROA), debt-to-equity ratio, dividend payout history, estimating future cash flows, and intrinsic value. - The exposure of the firm
- Market capitalization segments (large-cap, mid-cap, and small-cap) exposure
- Exposure by industry
You may sell the stock if the stock's fundamentals appear weak, the company's future growth appears challenging, the sector outlook appears challenging, your return expectations have been met, you have accumulated the necessary corpus to meet your envisioned financial goals, your risk profile has changed, portfolio review and rebalancing warrants the exit, you wish to change your investment strategy, and/or you require funds for an emergency.
If you've amassed enormous wealth in the short term, that's fantastic, but don't be fooled by the exceptional market returns we've seen recently. In the interest of your long-term financial well-being, take a prudent approach, be disciplined, and analyse your stock portfolio on a regular basis.
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