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.