The stock market
It is all about making the right choice and choosing the right stock, which not only matches the individual return criteria but also the risk appetite of the individual as well. As every investment comes with its own risk, it is not only the return that needs to be properly analyzed in order to get a pick most suitable for a person but determining the inherent risk with that investment is equally important.
But what should be the approach in order to choose that right stock? There is no sure shot way to make an investment which would give assured risk-free return higher than nominal options. A person can undertake a proper analysis and then choose the stock best suited at that conditions, but will also have to bear the risk associated with it, even if it is the right stock for investment.
What does stock represent in the stock market?
They are part ownership rights in the listed companies, buying which makes you the part-owner of that company. So you have to look at the company when you invest in the stock market. But then what essentially a company is?
A company is a set of businesses that run under independent or interdependent brands that earn profit to give value to the company. So instead of focusing on the price movement of stocks, which are derivative of company business performance only, the right way to look at the best investment in the stock market is to look study the business level and strategies of the companies.
We can plot a step wise detailed manner, which can help us do a stringent, detailed, and comprehensive analysis of industry and Company which will give us a holistic view of the business environment in the country an help us choose the right business and company to invest in.
Economy wise analysis
When the economy grows, most industry segments and industries are profited and thrive similarly in the same fashion most sectors and industries typically struggle when the economy declines. Studying the position of the Economy, future prospects of Economy decline, and Economy growth and factors like basic interest rates can give much-needed idea needed to choose the right investment.
It is important to know the cyclic nature of the economy, which sectors are likely to get affected by this cyclic nature, what is the risk-free interest rate is also very important to know. It can form the base around which the risk-reward trade-off of the investor will be. Knowing the risk-free rate will help investors to know the premium that one should expect for risk one takes. Moreover knowing about the Political position of the Economy, Socio-Economic conditions, and Technological advancement in the country will give you a much important idea of moving forward.
Sector Wise Analysis
After you have analyzed the Economy-wise analysis and have a great idea about the Macro factors that one should consider, the next step is Sector wise analysis. Every Economy can be best in every possible product and each sector cannot offer the same growth levels over the long term.
Knowing about the conditions of the Economy and how they favor different sectors in terms of future demand of economy and current requirements of the sector with the resource availability in the Economy, can help us identify sectors that are likely to outperform the overall Economy.
For example – IT stocks in the 1990s and 2000s were one of the best performing sectors, due to the rising demand for IT and related services and also due to cheap skilled labor available to work. They outperformed and provided a greater return than the market average. Identifying such opportunities become important to make the correct decision.
After analyzing the sector or sectors that will potentially outperform the Economy return, the next step will be analyzing the Company. Not all companies for that sector will be a good bet just because it is in that sector. Analyzing different companies in that sector is equally important.
First, you can start with a broad comparative analysis of all major companies in that sector on fee major factors like revenue and profit growth and some ratios. After shortlisting a few companies through this, follow compete for fundamental analysis of the selected companies. Study the qualitative factors for the company, analyze financials, and ratio analysis. After that choose whether the company is a good buy at that price or not before taking any decision.
Along with this top-down approach, you need to undertake an analysis of some other factors as well. Firstly in properly know about your risk appetite and the capital you can invest. It is not required to take those risks that you cannot afford.
Undertake sufficient and accurate Portfolio management and Reallocation techniques to keep your portfolio updated. Be aware of the malpractices and the frauds in the market. You should be aware of all these factors as they can erode your returns even after making the right choice. Be aware of your rights as an investor and how to handle your complaints.
Undertaking this analysis can be one of the most efficient ways to make the right investment in the stock market. It is the basic technique that will be suitable for most investors. It does not mean that other strategies won’t work. Each strategy that suits you and is adaptable to you is great. It is one of the safest and accurate techniques, which if followed correctly, can at least won’t let you lose any money in the stock market, and if undertaken with good market awareness and regular tracking can give you good returns, but in long run, as this strategy is focused on Long term investment returns.