Equities Investment: Strategies For Beginners To Start

Investing in equities involves purchasing shares in a company, making you a partial owner and giving you the right to participate in the company's profits. There are two main ways to invest in equities: direct investment through stocks and investment via mutual funds. Direct investment in stocks requires opening a trading account and a demat account, while investment via mutual funds can be done through a financial advisor or directly from a fund house. When investing in equities, it is important to consider your financial goals, risk tolerance, and investment style. Additionally, conducting thorough research and analysis is crucial for making informed investment decisions. Understanding the different types of equity funds, such as actively managed and passive funds, is also essential. By investing in equities, individuals can potentially achieve higher returns and build wealth over time, but it is important to remember that there are risks associated with equity investments, including market volatility and the possibility of losses.

Direct investment through stocks

Direct equity investment via stocks requires opening a trading account and a demat account. The demat account holds your shares in an electronic format, while the trading account is where you place buy and sell orders with your stockbroker. This option offers a high return potential, depending on your stock-picking skills and ability to sell at the right time.

When opting for direct equity investment, you can choose from a large universe of stocks, including large cap, mid-cap, or small-cap firms. This option provides the freedom to select stocks based on their growth potential and your risk tolerance.

However, direct equity investing requires careful risk management. It is essential to conduct thorough research on various parameters before purchasing a stock, stay updated with market developments, and understand the jargon and fine details of the stock market. Additionally, it is crucial to understand the balance sheets and order books of companies before investing.

Direct Stock Plans

Some companies offer direct stock plans, allowing investors to buy or sell stock directly from them, eliminating the need for a broker. These plans may have certain requirements, such as already owning stock in the company or being employed by the company. There may also be minimum investment amounts or account balance requirements. It's important to read the company's disclosure documents before enrolling in such plans.

Investment via mutual funds

Mutual funds are a popular way to invest in equities, especially for those who don't want to pick individual stocks themselves. They are a type of investment vehicle that pools money from multiple investors to purchase a diversified portfolio of stocks, bonds, or other securities. This provides individual investors with access to a professionally-managed portfolio and the benefits of economies of scale, while also spreading risk across multiple investments.

Professional Management

Mutual funds are managed by professional fund managers who conduct research and make investment decisions on your behalf. This means you can leverage their expertise and experience, which is especially beneficial if you don't have the time or knowledge to pick stocks yourself.

Diversification

Mutual funds provide instant diversification by spreading your investments across various industries and sectors. This helps to reduce the overall risk of your investment portfolio. While one industry may be performing poorly, another may be doing well, thus stabilising your returns.

Lower Risk

Due to the diversification that mutual funds offer, they generally carry lower risk than direct equity investments. The impact of poor-performing stocks is reduced as the risk is spread across all participants in the fund.

Moderate Returns

Mutual funds typically offer moderate returns. While they may not provide the same high returns as individual stocks, they also come with lower risk.

Flexibility and Liquidity

Mutual funds usually have a low minimum investment requirement, making them accessible to a wide range of investors. They also offer the flexibility to buy and sell at any time, although it's important to be mindful of cut-off times to ensure transactions are processed at the desired Net Asset Value (NAV).

Fees and Expenses

Mutual funds come with various fees and expenses, including expense ratios, exit loads, and management fees. These costs can impact your overall returns, so it's important to consider them when choosing a fund.

Research and Control

When investing in mutual funds, you rely on the expertise of fund managers rather than conducting your own research. This can save you time and effort, but it also means you have less control over the specific investments within the fund.

Long-Term Investment

Mutual funds are generally considered a long-term investment option. While you can buy and sell at any time, they are most suitable for investors who are willing to hold their investments for several years to benefit from compound interest and long-term growth.

Choosing the Right Mutual Fund

When deciding on a mutual fund, consider your investment goals, risk tolerance, and time horizon. It's also important to research the fund's performance history, fees, and the types of securities it invests in. Consulting a financial advisor can help you make an informed decision.

Understanding risk and investment style

When investing in equities, it's important to understand the risks involved and the different investment styles available. Let's break down these two key concepts:

Risk in Equities

Risk is inherent in any investment, including equities. It refers to the possibility of losing some or all of your original investment. In the context of equities, the biggest risk is that the price of your holdings can fall, resulting in a loss if you sell at that time. Market risk, or systematic risk, is a significant factor as it pertains to external factors such as political and macroeconomic events that can impact the entire market. Unsystematic risk, on the other hand, pertains to company-specific or industry-specific hazards.

Other types of risk to consider when investing in equities include:

• Credit or default risk: The possibility that a company may be unable to pay its debts or meet its financial obligations.
• Foreign currency risk: Changes in the value of different currencies can affect a company's value.
• Liquidity risk: The ability to convert your investment into cash when needed.
• Political risk: Political instability or changes can impact a company's returns.
• Inflation risk: Rising inflation can dilute a company's value.

It's important to note that long-term investing in equities can help mitigate some of these risks, as the impact of short-term price fluctuations is reduced over time.

Investment Styles

The investment style refers to the approach or objective that a fund manager uses to select securities for a portfolio. For equity investments, the style is determined by the size of the company and its value/growth characteristics. The specific size parameters include large-, mid-, and small-size companies, categorised by market capitalization. The value/growth categories include value, growth, and neutral.

When evaluating an investment manager's style, prospective investors can consider the fund's performance and reviews from financial services companies. It's also crucial to understand your own risk tolerance and investment goals, as these will influence the investment style that aligns with your financial strategy.

Choosing an investment account

Retirement accounts

If you're self-employed or own a business, there are specific types of retirement accounts just for you. For everyone else, a 401(k) or 403(b) plan (through your employer) or IRA (on your own) may be a good choice.

Education accounts

One of the most popular types of accounts used to pay for education expenses is the 529 savings plan. This is a state-sponsored investment plan that lets families save for future education costs and withdraw investment earnings tax-free when used to pay for qualified expenses, including tuition, room and board, and supplies.

General investing accounts

If you prefer a little more flexibility, you can open a general investing account. With this type of account, you can buy and sell whenever you want, but you pay taxes on your investment earnings.

Standard brokerage accounts

A standard brokerage account provides access to a broad range of investments, including stocks, mutual funds, bonds, and exchange-traded funds. Any interest or dividends you earn on investments, as well as any gains on investments that you sell, are subject to taxes in the year that the money is received.

Custodial brokerage accounts

This type of investment account is set up for a minor with money that is gifted to the child. An adult maintains account control and transfers assets to the child when they reach adulthood.

Demat accounts

If you wish to invest in equities directly through stocks, you need to open a demat account to hold your shares in an electronic format and a trading account to buy and sell orders with your stockbroker.

Picking stocks

Fundamental Analysis:

Fundamental analysis involves evaluating the underlying company's business health, industry position, and broader economic conditions. Investors traditionally use fundamental metrics like earnings per share (EPS), price-to-earnings (P/E) ratio, P/E growth, and dividend yield for longer-term trades. This approach helps identify stocks offering strong growth potential at a reasonable price.

Technical Analysis:

Technical analysis focuses on identifying statistical patterns and trends in stock charts to predict future price movements. It assumes that stock prices already reflect all publicly available information about a company. Technical analysis is often used for shorter-term trades or to pinpoint entry prices after fundamental analysis.

Growth Investor's Strategy:

Growth investors focus on a company's future prospects, particularly revenue growth. They seek companies with innovative products or compelling competitive advantages, as these tend to attract more investors, driving up stock prices.

Value Investor's Strategy:

Value investors seek companies whose current stock price seems favourable, given their financial health and performance metrics. They often target industry-leading companies that are past their peak revenue growth years, as these tend to pay steady dividends and have low P/E ratios.

Screening for Growth or Value:

Utilise stock screening tools to narrow down a vast array of stocks to a manageable list of quality growth or value candidates. Consider focusing on stocks with strong revenue growth prospects and those rated highly by equity ratings agencies.

Selecting Stocks Using Technical Signals:

Stock selection using technical analysis typically involves screening stocks based on price, market capitalisation, sectors, industries, and momentum. Then, narrow down the list by scanning charts for potential entry points, such as breakouts or pullbacks in the stock price.

Setting Up the Trade:

Once you've selected your preferred stocks, apply technical indicators like price patterns, volume, moving averages, and the stochastic oscillator to fine-tune your choices. Compare indicators like the %K and %D lines to identify potential shifts in momentum.

Diversification:

Diversifying your portfolio across different industries and sectors helps mitigate risk. Different events and market forces can uniquely affect each industry, so spreading your investments can provide a buffer against potential losses.

Long-Term Perspective:

Equities are inherently volatile, and their prices can fluctuate due to various factors. Adopting a long-term perspective can help you weather short-term price swings and reduce the overall quantum of volatility in your portfolio.

Professional Management:

Consider investing in mutual funds, where a fund manager leverages their expertise to select stocks and make informed investment decisions on your behalf. Mutual funds can provide professional management and diversification benefits.

Expense Ratio:

When investing in mutual funds, consider the expense ratio, which is the percentage of fees charged by fund houses. Direct plans typically have lower expense ratios than regular ones, and a high ratio can eat into your profits.

Long-Term Fund Performance:

Evaluate the fund's long-term performance and consistency in delivering returns, especially during bearish market phases. Opt for funds with consistent returns and effective management of losses during market downturns.

Due Diligence:

Whether investing directly in stocks or through mutual funds, conduct thorough research. Understand the companies' balance sheets, order books, and market developments. For direct stock investments, ensure you comprehend the stock market jargon and fine details.

Risk Management:

Direct equity investing requires careful risk management. Stay abreast of market developments, conduct comprehensive research, and make informed decisions to mitigate potential losses.

Inflation-Beating Returns:

Equities offer the potential for returns that outpace inflation over the long term, making them suitable for long-term goals like education and retirement planning.

Capital Appreciation:

Equity investments can significantly appreciate your principal capital. Investing in equity shares of fundamentally sound companies usually leads to price appreciation over time.

Voting Rights:

As an equity shareholder, you gain voting rights on matters related to the company's board of directors. This empowers you to have a say in crucial decisions affecting the company's direction.

Frequently asked questions