Knowledge HubWhy is Research Important in Investing?

Hey, This week I was reading a circular from a regulator where they are talking about the rise of unauthorised companies who keep giving stock tips in the name of research. Such tips are the major reasons why retail investors lose money in the market nowadays. Let me tell you guys, Investing is not an easy task. It involves a lot of macroeconomic factors like GDP, interest rates, inflation, and all. Also consider micro factors like the business model of the company, the capability of promoters, competition, etc. Before investing such factors shall be studied in detail. But research is not everyone’s cup of tea.

People do carry out strong research before buying mobile phones, and televisions. Even before putting their child in a school they do a thorough research. But In investing they are widely dependent on tips.

Let me take you through the entire research process and show you what alternatives you have as an investor.

What is investing?

Investment means committing money with the objective of earning returns. It requires a thorough and detailed analysis of the underlying security in terms of safety/risk, income, and growth potential.

Research is an important aspect of investing to help an investor decide on his investment style and gather relevant information about the economy before putting in his hard earned money.

Active Investing

Active investing involves identifying the individual stocks or a basket of stocks (a portfolio) to be traded. It requires constant evaluation of every security in the investment portfolio on a continuous basis. Active investing means selling stocks that have reached their fair value (target) and also scanning the market for new opportunities.

Passive Investing

Passive is a style that is diametrically opposite of active investing. An investment rule or formula is defined, and the same is followed with a minimum deviation. The most common kind of passive investing is indexing. Each asset class has an expected rate of return based on parameters such as safety, risk, and growth potential. A passive investment strategy aims to match that expected rate of return.

The role of research in investment activity

The roles of a fundamental research analyst are divided into two categories: research and analysis. Study includes gathering all relevant information, whereas analysis involves analysing all the information that is currently accessible to reach a conclusion. One source of information about a company, for instance, might be its annual report. However, obtaining thorough insights into the company’s business and profitability involves a very detailed scrutiny of the annual report. And often, the information in annual reports is not adequate. In such cases, an investor must dig deeper and go for secondary sources of information.

Insider Information vs Mosaic Information

Investors are often tempted by inside information or source-based reports available through social media. These reports are often unreliable and may amount to inside information.

Insider information is material, non-public information that, when published, would immediately affect an investor’s decision to buy or sell the security. The source of the information (how reliable it is), the impact, and the certainty of the information all influence whether it can be considered insider information. Analysts gather information from different unrelated sources, and then try to look at the complete picture. This is like making a mosaic, and thus it is known as mosaic analysis. Mosaic analysis is an acceptable mode of research and not considered insider trading.

Technical Analysis

Technical analysis assumes that all information that can affect stock prices, company fundamentals, economic factors, and market sentiments is reflected in the stock prices. A technical analyst aims to forecast prices by studying patterns in historical market data for both price and volume. Technical analysts, (often known as chartists) hold that market activity will provide price trend indications that can be used to predict the direction and magnitude of future changes in stock price.

There is an entire debate in the investing community about whether technical analysis is research at all. It is a specialised subject and involves the study of various trends through charts and graphs. The focus is on both price and volume. The technical analyst speaks in terms of support, resistance, breakout, upwards, downwards, sideways, moving averages, etc. The key is to identify support and resistance levels (often referred to as S1 and R1). Often, the support and resistance levels are used to define the stop loss level for a trade. For a buy trade, support would be the stop loss, and for a sell trade, resistance would be the stop loss.

Understanding Risk

Research will help investors understand risk and build suitable investment and trading strategies to mitigate it.

If you are not able to spare time for research but want to invest in the market, Mutual funds are the tool you can explore to invest. AMCs have the inhouse research time along with the fund manager who decide where your funds shall be parked.

Jhaveri Securities has an inhouse research team along with a strong Mutual fund distribution base. We are one of the leading distributors of Mutual funds in Gujarat. If you would like to invest in Mutual funds please give a missed call on 9555066040.

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