Stock Market Investments – An Understanding & Analysis

Stock Market Investments – An Understanding & Analysis

27 May 2020

Amongst the myriad asset classes available for investments, equity or stock market investments are comparatively riskier investments, but at the same time, carry the potential of higher returns, unmatched by few others.

Seasoned investors and market veterans, who have navigated the volatility and uncertainty of equity markets through multiple business cycles, know pretty well that this can be a roller-coaster ride, with the potential for fortunes to be made or wiped out in practically no time.

Let us assume that you have brought some shares in a company by investing your money. Now, you want to analyse whether there is an appreciation in the money invested or not. Depending on whether your company is growing or faltering, the value of your shares will rise or fall. If it rises, you can sell your shares to book your profits, or if you are desirous of higher returns, then you will have to wait for the peak to happen.

The timing of the peak is unknown, as you don’t have any idea of how high the prices will go. When you feel that you are getting a good return on your investment and are closer to your financial goals or need money, you should avoid falling prey to the “greed” factor and book your profits, particularly in volatile and unpredictable markets.

There are many factors which affect prices of any stocks, and there are many risks associated with it. If we understand these risks methodically, then we will be careful while investing in the markets. Let us discuss some significant risks related to equity investments -

1 . Market risk - The risk of investments declining in value because of economic developments or other events that affect the entire market. The main types of market risks are equity risk, interest rate risk and currency risk.

2 . Liquidity risk -The risk of being unable to sell your investments at a fair price and get your money out when you want to. To sell the investment, you may need to accept a lower price. In some cases, such as exempt market investments, it may not be possible to sell the investment at all.

3 . Credit risk - The risk that the government entity or company that issued the bond will run into financial difficulties and won’t be able to pay the interest or repay the principal amount at maturity.

4 . Reinvestment risk - The risk of loss from reinvesting the principal or income at a lower interest rate. Reinvestment risk will not apply if you intend to spend the regular interest payments or the principal at maturity.

5 . Inflation risk -The risk of a loss in your purchasing power because the value of your investments does not keep up with inflation, which erodes the purchasing power of money over time.

6 . Horizon risk - The risk that your investment horizon may be shortened because of an unforeseen event, for example, the loss of your job. This may force you to sell investments that you were expecting to hold for the long term. If you must sell at a time when the markets are down, you may lose your money.

7 . Longevity risk -The risk of outliving your savings. This risk is particularly relevant for people who are retired or are nearing retirement.

8 . Foreign investment risk -The risk of loss when investing in foreign countries. When you buy foreign investments, for example, the shares of companies in emerging markets, you face risks that do not exist in Canada, for example, the risk of nationalisation.

Notwithstanding what has been elaborated above, if you hold shares of fundamentally sound companies with a good track record and visible earnings growth and long-term profitability, the probability of the prices of such stocks falling too low are considerably reduced. Just because there has been a slight correction in the market, it does not mean that your investment in such quality stocks is likely to be affected. Do remember that in the equity markets, it is not about timing the market but about the time spent in the market remaining invested, which is important.

In case of a continuous and prolonged fall in the market price of your stocks, you need to thoroughly evaluate the reasons for the same:-

  • is there some issue within the company itself? Or
  • is the whole sector / economy in general under a strain? Or
  • is there any new policy change or regulatory guideline which is having an adverse impact on the growth prospects of the business?

Depending on the aforesaid reasons, you should rationally decide whether to exit such stocks altogether or book some profits. Hence, it is imperative that you do your own research by tracking business news regularly or availing the services of competent and qualified professional fund managers and finance professionals.

The existence of robust capital markets paves the way for companies to go public by offering their shares. The capital thus collected is used for financing all its expansion and developmental plans. A company goes public through the Initial Public Offering (Or IPO) route.

To sum up, it requires a lot of patience and perseverance to understand the stock markets fully. Sound in-house research and seeking professional guidance from competent financial planners or fund managers can keep you in good stead to digest the volatilities, uncertainties and vagaries associated with this asset class. Invest with care and caution, keeping in mind your risk-tolerance levels.

We wish you a safe and rewarding investing journey!

Founded in 2005 by new–age entrepreneur Abhishek Bansal, the Abans Group has evolved into a globally diversified conglomerate, providing expertise in Broking Services, Non-Banking Financial Dealings, Financial Services, Agri-Commodity Services, Warehousing, Realty & Infrastructure, Gold Dore Refinery & Manufacturing, Trading in Metal Products, Pharmaceuticals, Software Development & Wealth Management. The Group is a comprehensive financial and non-financial services and solutions provider, aiming to provide end-to-end solutions to its clients.