No one can predict stock prices with 100% accuracy. One can make a reasonable guess based on available information. So, chances of losses are as much as of gains. Here, value investing comes into play. Don’t panic when stocks crash or celebrate when they rise steeply. Be calm to both. Also, before investing one has to ask herself: How much money can I spare for long term without stressing personal finances?
What a retail investor should do?
Equity investment is a long term game. Since the stock market overreacts to both good and bad news, one should look for buying stocks that they believe the market has undervalued. Similarly, investors could also look for companies that show above-average growth. Take the advice of a stock broker if needed.
What to do in the present Indian stock market scenario?
Currently, Indian stock market is at an all time high thanks to strong macro-economic fundamentals and low commodity prices. So, one should prefer to buy stocks of good performing companies when their IPOs hit the market. Typically, pricing is reasonable in the IPO. Take the example of the recent IPO of Hudco: the stock of the company appreciated 20% on the day of its listing. There are a large number of stocks that are going to be listed this year: General Insurance Corporation, New India Assurance and Hindustan Aeronautics, to name a few. Similarly, there are good stocks in the private sector space also. Even now, when the stock market is at an all time high, some stocks have considerably declined in the past few months. It is a good time to invest in some of these stocks if the price is attractive as the negative run would come to an end sooner than later. Similarly, IDFC Bank, the newest among the lot, is a good bet. Similarly, one should track stocks that consist BSE Sensex and NSE Nifty.
Another good bet for retail investors could be exchange traded funds (ETFs), which invest in a basket of stocks, thereby lowering risks associated with individual stocks. For example, CPSE ETF (now managed by Reliance Mutual Fund) was sold at Rs 17.45/unit to retail investors in March 2014. Its price per unit is now ruling at around Rs 29, up 65%. The government will launch a new ETF in 2017 through which it will sell its shares in PSUs as well as in some blue chip private companies. One could consider investing in the new ETF and stay invested for long (5-10 years). Similarly, one can pick other ETFs which track the performance of the industry/index.
What an ideal investor should consistently do?
Select your stocks based on specific criteria such as sector, dividend yield, market cap and other useful metrics. Read stock analysis articles, financial news and stay critical. Stay away from penny stocks, which are cheap, but not liquid. Remember what Warren Buffet, who made a fortune by investing in stocks, said: buy stocks that you want to keep.