How to tap attractive opportunities in the stock market

The rally in the stock market post-Covid-19 drew several new investors to Dalal Street, with the number of demat accounts shooting through the roof. While these new investors understand the potential of equities to earn superior returns, they certainly need to reconsider their approach toward markets. Recent NSE data shows that over 38 lakh clients left the stock market between June 22 and January 23. The main reason behind this mass exodus from the market is the group of investors primarily interested in making quick returns.

A study by the market regulator Sebi suggests that of the 45.24 lakh individual traders in futures and options in the financial year 2021-22, only 11 per cent could eventually register a profit. Though trading in stocks can be an effective way to make money, it requires a certain level of skill and knowledge that not everyone possesses. On the other hand, with patience, discipline, and a long-term outlook, anyone can learn to invest. With a systematic investment approach, you can earn returns that outpace inflation and achieve your financial goals.

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Here are a few steps to make your equity investments more effective:

Do not follow hot tips blindly

Hot tips are for speculative trades. As an investor, you should rely on your conviction and not on opinions from the internet market gurus. Even if you want to act upon someone else’s advice, you must conduct your due diligence to see if the company is fundamentally good enough and if the growth story is intact. While stock ideas can be borrowed, a conviction cannot. It comes from within. Money is made on themes or stocks that are yet to be discovered by the market. If you pick up a stock already rallying in the market, it is called momentum trading and not investing. Invest in such companies only if their fundamentals warrant more upside. To make that decision, you need conviction based on solid business growth prospects, not greed.

Look into financials

You must develop the habit of checking financials before investing in a company. Companies are required to come up with quarterly results. Companies in a few sectors, such as automobiles, offer monthly updates. Besides, analyst calls post the quarter results are available on exchanges or company websites. You need to read them carefully. Check what the management is up to, what their guidance is, and if they met their previous guidance. Also, look at their Capex plans and evaluate their implications on short and long-term performance.

Check if the debt is manageable

Having debt is not a problem. Companies in capital-intensive sectors do raise debt. If you ignore companies with debt, you may lose out on opportunities in the infra-related sectors as and when capex cycles are in full swing. Instead, you should assess whether a company with debt and, in some cases, significant debt can generate enough cash flows to service that debt. If the company generates a thin profit after raising debt, that is not a good sign. It means if there is a broader economic slowdown, that company may find it difficult to service its debt. At the same time, keep an eye on promoter pledging. If the pledging is high in a rising market, that should not be a problem. But in a falling market, it could be a big concern.

Stay invested

You cannot have multi-bagger returns overnight. If you stay invested for the long-term, you reap the benefits notwithstanding short-term negative moves. Volatility is part and parcel of stock investing.

A company in the middle of a Capex cycle or facing short-term disturbances due to raw material shortages or problems at a plant may not do well in the short term. But if the company fundamentals look intact from a long-term perspective and the stock prices have fallen quite a bit, there is no harm in considering the stock.

Successful investing eventually boils down to patience. Rushing into investments without proper due diligence can lead to poor decisions. It is essential to take the time to analyse the fundamentals to make informed choices that align with your financial goals and risk tolerance.