Someone who does not have additional disposable capital and is in the phase of savings on monthly basis should go with mutual funds, particularly SIPs.
Since the outbreak of the COVID-19 pandemic, the stock market has been extremely volatile. However, from the lows of March 2020, the leading stock market indices have bounced back to pre-COVID-levels. Three major factors were seen to be pulling retail investors into the world of direct investments – One, the availability of share prices at low value during the March meltdown; secondly, the list of companies coming up with their IPOs; and thirdly, the work-from-home environment that gave the retail individuals to latch-on to the bandwagon.
Of late, the industry data shows several new Demat accounts opened which shows the rising interest of retail investors in the equity markets. But, direct investment in stocks is considered to be much riskier than investing through mutual funds. In an interview with FE Online, Vivek Bajaj, Co-Founder StockEdge, gives his views on how retail investors should approach the stock market, what strategies to use as a new investor and much more. Read on to know the basics of stock markets before taking the plunge.
A lot of new investors seem to jump on to the world of stock market investments. What will be your advice to them?
My first advice to them will be to define the objective of participating in the Stock Market. Are you here because you have time available due to the work-from-home syndrome or you want to use the stock market for long term wealth creation.
The first objective is linked to utilisation of idle time or to evaluate whether the Stock Market is the right place for you. Typically, a user gets involved in trading activities during this phase. Nothing wrong with that, till you know your limits. However, if the objective is to create long term wealth a clear strategy is required in terms of investing in sectors/companies where there will be an extra edge when the economy recovers.
The best way to approach the market is to become very focus initially. I always suggest new investors adapt 10,10,10 strategy. Focus on 10 stocks for the period of 10 months and keep a target of a maximum 10 per cent of your stock portfolio allocation per stock if you are an investor. If you are a trader target not more than 10% loss per month out of your fixed allocated trading capital.
What are a few important things to keep a note of while opening a new Demat account and a trading account?
The most important aspect is to look at your objective as defined in above-mentioned point and select the right intermediary. One should not get lured by marketing by various agencies. If you want to invest your support of an intermediary who would provide you with value-added information/research to facilitate your journey. If you are a trader, the cost of the transaction becomes a critical factor for decision making. Typically, your Demat account and trading account stays with the same intermediary.
Who, according to you, should invest in mutual funds and who may try their hands with direct stocks?
Someone who does not have additional disposable capital and is in the phase of savings on monthly basis should go with mutual funds, particularly SIPs. Someone with investable surplus capital and wants to be hands-on with his/her personal financial management should add direct equity as part of the asset allocation.
Several IPOs are in the pipeline. How should one approach them keeping risk-return in view?
Investing in an IPO and investing in the secondary market is quite similar. IPO does not mean that the stock will be available at less price and the price will move up thereon. One should look at the company coming out with the IPO and evaluate the business in a similar way a person would evaluate any business. The scope of a business, the market size, competition and management quality should drive the decision making.