Before Picking up stocks..
After interacting with some beginners, I found 3 very silly mistakes that’s so common. So, i thought i should write about that in this article, with the help of an example.
– You buy shares in company ‘x’ of IT sector. The shares move up and you get a decent profit. From that moment, you are tempted to look more deals like that., preferably from the IT sector- since you get a feeling the IT sector is a sure bet !
Not only that, in the process of trying to find such deals, you tend to overlook other investment opportunities that come your way – a new mutual fund offer or a low rate in gold ETF or an opportunity to lock in a debt fund that’s available at a higher rate of interest.
- This is the first point – as long as your investment remains in a few stocks or markets, you may be missing on other opportunities. It’s important to have an overall view of the economy and financial markets regularly- and not just stock market alone.Beginners tend to concentrate on stocks alone and in the process, they forget to take note of what’s going around in the financial world. For example – in 2010-11, it was gold that out performed all other asset classes. Those who had an overall knowledge about financial markets would have invested a part of their funds in gold.
If I have noticed anything over these 60 years on Wall Street, it is that people do not succeed in forecasting what’s going to happen to the stock market. – Benjamin Graham
Recently I got a mail from a reader who wants me to predict accurately where the stock market is headed, instead of a broad market analysis. He wants a definite conclusion and a definite direction about what to do.
First of all, in my opinion, it’s not possible to accurately predict Market movements. Making buy or sell decisions by predicting market movements is a strategy called ‘Market timing’. It’s one of the most controversial topics in stock markets. The viability of the strategy is something that’s debated for years now.
- Category: Before Picking up stocks..
Reviewing the shareholding pattern and the change in shareholding pattern could be useful to the investors. It shows how shares of a company are split among the entities that make up its owners.
- The Shareholding structure is declared every quarter
- As a rule of thumb, higher promoter’s stake is perceived as positive and a lower equity stake could mean low confidence of promoters in their own company. Rise in promoter stake is considered positive because promoters will commit additional fund only when they are optimistic about future growth of their company.
- Similarly a higher FIIs stake is considered as positive and a lower FII participation could mean low confidence of FIIs in the company. Rise in FII stake is considered positive as they will commit funds only when they are totally optimistic and confident about the future prospects of the company.
Remember the topic on market capitalization? Market capitalization is how we measure the total worth of a company. It is the way you categorize companies by size. A simple way of thinking of it is – how much you would pay to buy all the shares of that company available in the market. The term ‘cap’ is the short form of capitalization. General break down by size of companies are:
There is no standard definition of Large Cap and it varies from institution to institution. But as a general rule, if a company has a market capitalization of more than Rs. 5000 Crores, it is considered as a Large Cap. A Large Cap company is normally a dominating player in its industry, and has a stable growth rate. It should be noted that almost all the Large Cap companies from India would be considered as Mid Cap or Small Cap companies in a global scenario, as globally, companies are usually classified as Large Cap if their market cap is more than $10 Billion (roughly Rs. 39,000 Crores).
If a company has a market capitalization of between Rs. 1000 Crores and Rs. 5000 Crores, it is considered as a Mid Cap.A Mid Cap company is normally an emerging player in its industry. Such a company has a potential to grow fast and become a leader (a Large Cap) in the future. Mid -cap companies can show very high growth rates (in percentage terms), because they have a small base – since their size is small, even a small incremental increase in revenue / profits can be a big figure when expressed in terms of percentage.
If a company has a market capitalization of less than Rs. 1000 Crores, it is considered as a Small Cap. A Small Cap company is normally a company that is just starting out in its industry, and has moderate to very high growth rate. Such a company has a potential to grow fast and become a Mid Cap in the future. If you invest in the small cap markets expect volatility and failure. It is always risky to invest in these kinds of shares. But this doesn’t mean that you should stay off from small caps. Small caps should form part of your portfolio in a limited manner.
See the BSE list of Mid caps and small caps :
- A company’s survival is not guaranteed by size; however, it helps to be a fairly large fish if you are going to swim in the big pond. Small companies or small –caps are risky investments, but can pay big rewards.
- You should not have too much exposure to small-caps if you are the risk-averse types. Mid-caps and small caps rise faster than large-caps in bull markets, but also fall as rapidly.
- Large-cap companies are typically more stable with larger, more diversified revenues and have steady predictable earnings. That is not to say that many a large cap has not melted down.
- Mid-caps tend to have some of the stability of the large caps but also some of the high-growth prospects of the small caps. Mid caps also have institutional ownership but to a lesser extent than large caps do.
- You should invest your money in a mix of large-caps, mid-caps and small-caps. Large caps would bring stability(steady growth) over long term, mid caps would bring in the acceleration (fast growth) and small caps would bring the excitement( risky investments, but may pay big rewards)
- A 60% exposure to large-caps , 30% in mid-caps and 10 % in small caps would be a balanced investment strategy, however, what is the right mix depends on an individual’s risk tolerance capacity
- Investors may note that the total amount to be invested in equities would ideally be 90-your age. The balance should be invested in debt funds
bye for now !!
have a nice day !!
- Point Blank
- Financial Discipline for all.
- Investing Basics
- Shares & Stock Markets
- Introduction to Financial Statements
- Financial ratios.
- Stock investing strategies
- Technical Analysis I
- Technical analysis II
- Before Picking up stocks..
- Choosing a Broker and opening Demat Accounts
- Make your debut !!
- More ... from stock markets.
- Valuation of shares
- Futures and Options - The basics.
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