If you’re a young person looking to invest in the stock market, there’s never been a more appropriate time with the current Financial year coming to an end, how can you leverage your next financial year and make it work for you? Indian markets have been witnessing a prolonged boom over the past few years and almost all the sectors, especially FMCG, Non-banking financial institutions, Steel, Cement, Automobile, Coal have been showing good results. Also, there has been resurgent growth in agri-stocks, pharmaceutical and insurance. It’s a good time to plan your equity investments and build a portfolio. But, there is a common misconception that equity investments are risky and will lead to losses.
However, it all depends on what stocks you pick, how much you diversify your portfolio. Yes, there are other avenues such as mutual fund SIP’s, treasury bond investments, day-trading; but considering the long-term asset creation that will result from equities, it’s the go-to option if you’re willing to devote your time and energy towards taking on market risks in the equity market. Accordingly, this blog will focus on only equity investments:
A prudent equity investor must be methodical. What kind of investment strategy are you going to go for? How much of funds are you willing to invest when you begin? What are your targets? Will your projected returns on your current portfolio to meet requirements for reinvestment? It is crucial how much of your savings you’re willing to invest considering the aforementioned factors. Distributing it in fixed income securities, that is, risk hedging may help in maintaining your strategy.
Generally, any beginner will have the dilemma whether to earn a quick buck in the market or to wait and diversify the portfolio. The factor of capital availability separates these two goals. So, every investor must set targets; short-term, medium-term and/or long-term ones. Lack of reinvestment capital in short-run can be tackled by maintaining your portfolio in such a way that the stocks have potential to boom in the near future. In that way, cash flow generation through their sale can be redirected towards more stable and asset-driven stocks in the long-run.
Stock picking requires that the investor is well-informed about the performance of the stocks that is being targeted. Price-to-earnings ratio is usually a good indicator to pick prospective stocks (below 15 is good). Also, market capitalization, dividend yield as well as its advance-decline ratio are decent indicators, and help decide how much of your assets are you willing to lock in a particular stock.
Invest in a wide range of sectors with different levels of market capitalization will help create synergies within your portfolio. It’ll help your share values to increase collectively and a higher cash flow can be expected.
5. Be a contrarian
Stocks that have potential to increase in future, but are at a low market value must be clinched from the secondary market, depending on how much volume of shares you’re buying. Being a contrarian investor helps you to pick stocks when the market is down and gain from them in future periods.
Last but not least. Learn how to manage your cash flow. Look out for new opportunities in emerging fields.
Hope these tips are helpful and you're on your way to create a long term value adding portfolio.