Many have the wrong notion that investing in stocks is rocket science and not everybody can do it. But it requires a lot of time, research and patience. Investing in the stock market is both an art and science. Selection of stocks is very important as this plays a major role. There are many things that have to be considered while selecting a company. Firstly, you should know your risk tolerance that is whether you are a high risk taker or low risk taker and you should also be clear with your goals and time horizons by which they have to be fulfilled. An investor can either follow a long term investing strategy or a short term investing strategy. If you have a plan of buying a car in the next 5 years, you can choose to invest in a particular asset that will give you desired returns within the stipulated time period. But if you have a goal that needs to be fulfilled within a year, you should choose the asset in accordance to that.
What is Value Investing?
It is generally said as buying undervalued stocks i.e. buying stocks at a low value. Value investing strategy is not very easy but one can get good returns once he becomes an expert in picking stocks. Let us understand the various factors that have to be looked at before investing in a stock. Fundamental and technical parameters, promoters of the company and many other micro and macroeconomic factors may affect the price of a stock. The stock has to be fundamentally strong based on the company’s balance sheet, financial statements, etc. For example, there is a company which was doing exceptionally well and which is good in terms of numbers too but suddenly due to some reasons, the stock price becomes less. When others panic and prefer not to buy the stock, value investors pick these kinds of stocks. It is cheap and this is only a temporary factor affecting the price.
How should one select a stock?
As a value investor, one analyzes the fundamentals and sees that the company has great potential to grow in the future. This makes value investors to buy that stock even though it is trading at a price lower than its intrinsic value as they feel that the price will increase once the situation stabilizes. Intrinsic value is that which is calculated based on fundamental analysis alone. Buying a stock below its intrinsic value simply means that the market has not yet factored in the real value of the stock. So it is the best way to buy a good stock at cheap price. Margin of safety is a very important factor in case of value investing. For example, if you calculate the real price of the stock to be Rs. 200, any price below it would mean an undervalued price. But as a value investor, you would try to buy the stock with a margin of safety of 20% say at Rs. 180. By maintaining margin of safety, one can reduce risk and also try to avoid loss.
Value investing strategy involves in depth analysis of many factors including PE ratio, debt equity ratio, etc. Understanding the business of the company and knowing about the promoters of the company is very essential before investing. This kind of investing is usually done for a long term basis. Even if you don’t have time to do a complete research on the company, you can take the support of research experts and equity advisors to know about the stock and its performance. A regular monitoring of the stock in which you have invested is very essential. With time, one can learn the nuances of value investing and become an expert.