Tracking The Right Signals In Your Investment Radar
The vast multitude of people who are known as investors seek investments avenues in various forms . Be it equity, mutual fund, commodities or derivatives. But let us accept it whole-heartedly that the equity form of investments holds the greatest attraction for a large body of investors. It is mainly due to the fact that if an investor successfully identifies a wealth-creating stock of a company the reward of such an investment would surely more consistent, handsome and assured. In search of a prospective stock, the problem of identifying a prospective stock from thousands of stock which are traded in the market is a daunting one. And an investor goes by his experience, haunch and the expertise of the people who know the stuff well and present themselves as professional.
The market is typically categorized into three segments viz., large cap, mid cap and small cap in terms of capitalization. While there is no problem in understanding the meaning of large cap and small cap companies. There is a bit of grey area in the case of mid cap companies. The National Stock Exchange defines the mid cap stock as stocks whose six months market capitalization is between rupees 75 crore and 750 crore. In the USA the mid cap stocks are denoted by market capitalization between rupees 9000 crore and 45,000 crore. It is fairly obvious that a big chunk of the stocks which are known mid cap stock are of varying quantum
market capitalizations.
To a seasoned investor the shares of the mid cap segment are great lures. There is a strong opinion which favours investment in mid cap shares based on the logic that most of the large cap shares are saturated in terms of growth potential, profits and turnover. Another point which squarely goes against large cap is prevalent price of the share which is somewhat prohibitive.
The mid cap shares in comparison hold several advantages in this regard. In the shareholding pattern of many of these mid cap companies has presence of Foreign Institutional Investors, domestic Mutual Funds and rather high stakes of the promoters and these companies have high growth potential. The rate of growth is faster. As these companies are not very prominent in the initial phases and are not publicly visible, the task of identification becomes all the more difficult. A detailed look at the market capitalization figures would reveal the importance of the mid cap shares. According to a study large cap accounts for 27.48% whereas the share of the mid cap is a whopping 70.68% and for the small cap it is just 1.83%.
Of these three categories , the risks are many times greater in the case of small cap companies for a variety of reasons. These could range from low turnover, unprofessional management to heavy losses, economic unviability etc.
The points to be borne in mind in identifying a potential winner
In one's search for an ideal stock which has tremendous growth potential, the existence of entry barrier is an important consideration. If the entry into a particular line of activity or industry entails huge quantum of investment or expensive sophisticated technologies, the chances of entry of too many players in that particular field are limited .There are inhibitive factors like economy of scale, huge capital requirements, product differentiation, access to the distribution channel etc. For example L & T the engineering giant is one such company which has fewer competitors. If any company establishes its presence in a field which has entry barrier, the investor should have a good look at it. In terms of purchasing cost of the stock one can cash in on its being relatively new factor. The proverb “ the early bird gets the sunshine” comes into play.
It is equally important to study the competence of the team of management. The family-run shows should be given negative rating. Even though there are instances of successful family-run business houses but the number is just a handful. In this regard the record of a company in respect of compliance of the Good Corporate Norms should be studied carefully. There are other factors like passion and integrity of the management team.
An equity investor is better advised to direct his attention to the intrinsic value of the company than the movement of its share price at a given point of time. The factors like consistency, profitability and sustainability are significant aspects in buying decisions.
Going by the records and evidences the mid cap stocks have been found to be registering growth faster than heavy weight blue chip companies. But when it comes to the creation of wealth these blue chip stocks hold an edge over the mid cap.
The importance of keeping adequate funds towards securing one's investment in a stock specific action is very great. It is quite possible to commit an error of judgement while buying a stock and to retrieve the situation one can set it off by buying at subsequent lows to get a good average price.
There are factors like expansion plans in existing line of business, superior technology and well-established brands, earning, dividends, assets and sentiments involving a particular stock in the market which should receive due consideration. Expansion in unrelated or new areas should be viewed with caution.
In conclusion the aspect which greatly contributes to the success or failure must be highlighted which is the individual character of the investor. An investor who is averse to study and basically impatient and always prefers to go by market rumours is sure to burn his hands in this venture. The appreciation or depreciation of the stocks in one's portfolio does not take place at the same time. There are times when a particular bull run may not influence some of your stocks favourably and in a situation, an investor would be ill-advised to dump them in haste. Patience is the name of the game. Who knows in the very next bullish phase the stocks whose performance disappointed you most may be the star performers!
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