With India’s quantum leap in digitalization over the last few years, investing has become a breeze these days. Superfast internet with high smartphone penetration has changed the way Indians are shopping, working, planning their travel itinerary and investing too. However, experts point out this rapid digitalization has also brought along with it a massive and constant information overdose.
Abhishek Mishra, CEO and Principal Officer, Bonanza Insurance Broker, says “In the world of investing, the information sources could range from business channels, newspapers, and groups on social media platforms or even circle of friends or relatives.”
He further adds, “It is often seen that many investors rush to invest in stocks that are trending merely based on rumours or rush to exit a stock based on certain negative news associated with it without determining its actual relevance.”
Hence investors need to separate the chaff from the wheat to eliminate all the unnecessary information and make informed decisions.
Here are a few pointers to keep in mind while investing:
Not all stock tips that you receive may be genuine
Stock recommendations should be based on detailed research and analysis. However, in reality, Mishra says “most of the stock recommendations you come across from your circle of friends, relatives or on social media are often based on rumours or hearsays without any valid rationale supporting the recommendation.”
Besides this, experts say there have been numerous cases where operators deliberately spread rumours about a stock with vested interests using the pump and dump method to cheat innocent investors.
Mishra explains, under the pump and dump method, scammers first accumulate stocks trading at low valuations in large quantities and then spread rumours recommending buying the stock in large quantities stating different reasons. “There is an artificial demand in the stock when newbie investors start buying despite no change in its fundamentals,” he adds.
Therefore, when stock prices rise significantly, the fraudsters who spread rumours about the stock start dumping it in large quantities leading to a free fall. Innocent investors who are caught clueless remain trapped with no exit option due to a lack of buying interest in the stock.
Fundamentals decide the direction of stock prices in the long term
Experts say investors should always keep in mind that in the long term, the stock prices of a company will always follow the company’s fundamentals. So unless Mishra says “there are any changes in the fundamentals of the company, one should ignore the short term market noises around a stock and remain invested till the time it realizes its true potential.”
Review the company’s fundamentals regularly
Buy and holding fundamentally sound stocks, experts say, for the long term is a proven strategy for creating wealth. However, “after investing in a fundamentally sound stock it is also important to keep a track of the company’s fundamentals regularly,” adds Mishra.
Top reasons to consider while exiting a stock:
· The stock’s valuation has touched unsustainable levels
· The company has lost its competitive edge due to removal of entry barriers in the industry or other reasons
· There are some major or undesirable changes in a company’s management team
· Financial metrics of the company has deteriorated beyond the scope of revival
Bottom line
If you want to create real wealth from the stock market, according to Mishra, it is important to consider your stock investments as part ownership in a business.
Mishra explains, “When you invest in a stock after knowing its true potential, it is equally important to stay invested. There is absolutely no reason why you should sell it based on a piece of news unless there is a deterioration in the company’s fundamentals.”
He adds, “One should invest wisely after proper research. If required, one should not hesitate to seek professional expertise for investing.”