Investment Opportunities in the Indian Stock Market
While the stock market is a market where risk equities are traded, it has many submarkets
within. Each of these sub segments offers an investment opportunity for the investors.
There are trading stocks, there are investment stocks, there are growth stocks and
there are value stocks. Then of course there are dividend yield stocks, mid cap
stocks and small cap stocks in the market.
Why is the Equity Investment Opportunity Important?
A lot of investors tend to avoid the equity markets because they believe that it
is just too risky. They prefer the safety of bonds as they are more predictable
and reliable in terms of returns. But is pertinent to understand the biggest risk;
which is the risk of not taking any risk? When you invest for the long term in a
bank FD paying you 7% interest annually, then you are never going to create wealth.
Wealth is created by equities and in the long run they are less risky than other
asset classes as the time cycles tend to even out the volatility in the market.
Understanding the Investment Opportunity in Stocks
Investment versus trading
When you look at investing in stock markets, you can look at short term trading
versus long term investing. Short term trading is to focus on the opportunities
in the stock market while long term investing is about creating wealth. The stock
market gives you the opportunity to make the best of both these approaches to the
Large cap stocks versus mid cap stocks
You have a huge array of stocks available in the stock markets. There are the tried
and tested large cap stocks belonging to the established business groups. Then there
are the mid caps that are growing fast but could become large caps in the future.
As an investor you have a choice and it is always advisable to keep a healthy mix
of mid caps and large caps in your portfolio so that you get a blend of stability
and growth in equity markets.
Dividend yield stocks versus capital gains stocks
Normally high dividend stocks are either PSU stocks or stocks in the oil and banking
space. The markets are not very positive on high dividend yield stocks as they refer
to stocks that are having limited opportunities for expansion and growth.
Markets normally pay a premium for growth and such companies normally have a low
dividend yield. The choice is yours.
Growth stocks versus value stocks
While growth stocks are stocks that have momentum and growth in their favour, the
value stocks are the stocks that are available at very cheap valuations. Value investing
can be a trap at times since low P/E ratio normally implies that the stock is being
assigned a low P/E by the market.
When you pick value stocks in the market, you have to be careful to only select
stocks that are undervalued temporarily and have the potential to bounce back.
Stock investing versus hedging risk
Stock markets offer you a very wide array of investing and hedging products. Hedging
products are products intended to manage risk. Futures and options are typical examples
of risk management products in the stock market. You can hedge your risk either
by selling futures or by buying put options.
Options and futures are normally not treated as trading products but they are intended
more to protect the risk on your equity investments. The stock market gives you
the facility to trade in equities as well as in futures and options.
How to Tap the Investment Opportunities in the Market
The opportunities in the equity market are definitely wide but the question is how
to tap these opportunities in the best possible manner. There can be two approaches:
Research and discipline are the keys to successful market participation
A long term investor requires discipline as much as a short term trader. Discipline
is the mental ability to set tight rules and adhere to them.
Unless you are able to set such rules and stick to them, it is hard to make create
wealth in the long run. One of the most basic disciplines in investing is to do
rigorous research before investing and hold for the long term.
Adopt a phased approach to investing
It is practically not possible to catch the market tops and bottoms. Even the best
of investors and traders have not been able to do that. However, you can use P/E
ratio as a proxy.
The whole idea of phased approach to buying and selling (SIP approach) is that you
manage to get an average price that is better than the market price. That is a basic
rule of investing.