Stock market investing is a mind game

The mercurial character of the stock market has led many to believe that share trading is essentially a game of darts. This gross misperception has influenced many first-timers in the stock market to engage in blind, get-rich-quick speculative binges. But, binges like are always laced with financial disasters, and few have survived to see another day in the stock market.

indiabulls seeks to demystify the essence of share trading and provide every investor a long-term perspective of the stock market. It is our firm belief that stock market investing is an intellect-driven exercise that calls for a careful selection of the various options over a long period of time. By taking a long-term view of the investing options, we believe you will be amply rewarded on your investments.

To be a successful investor, it is important that you steer clear of the `herd mentality' and instead base your decisions on well-researched views and reports. In fact, much of this research can emerge from your own understanding of the stock market and the various financial products and services. By taking an active interest in the overall business environment, you will give yourself a strong chance of increasing your financial assets. You will also discover how exciting it is to learn about the fundamentals of the market, the decision-making process in the corporate world, as also the national and international policies that impact the stock market.

A well-informed investor is in a good position to know what his returns are likely to be in the long run. Whereas, a speculative drive can never assure you of long-term financial gains.

Stock markets by their very nature undergo fluctuations of fortunes

As an investor, you need to realize from day one that the stock market moves in cycles. That is, an investment that brings in fabulous returns at one time may bring in altogether different results at some other time. And, you will seldom be in a position to anticipate these changes accurately.

However, if you take a long-term position in your investments, you are fairly insulated from these fluctuations. But, at the same time, share trading is not about holding on to the scrips forever. To rake in the riches, you need to monitor the fluctuations in the market and establish certain trends that shape your portfolio of investments. That is, you need to look at the stock market as a barometer, not a thermometer. Every stock market fluctuation is indicative of the shape of things to come. So, if the stock market hits a low, investors can take it that the market has bottomed out and that recovery is just around the corner. At the same time, a sustained bull run will only mean that the market is no longer safe for investments.

The first sense therefore you need to acquire is that `the worse you feel, the safer the market is; and the better you feel, usually because the news is good, the closer you are to a top.

Zero in on your favorite scrips

For an individual investor, developing a portfolio can be a daunting task as there is a wide cross-section of scrips to choose from at any given point in time. Further, each of these scrips possesses unique traits and performs differently under different sets of conditions.

You can come out of this clutter by devising your own stock screen for developing your portfolio. Your stock screen may be pegged to a few measures, such as the minimum dividends offered by stocks, the minimum net profit margins of companies, etc. Screens can be an effective way to reduce your contenders from thousands of stocks to perhaps dozens. But, let this not be a final word on your investment decisions. You need to do further research on the short listed scrips.

You can begin by studying the profiles of the companies that figure in your list. Ask yourself if you can relate to the products and services of any of these companies. In your list you will discover certain companies that command a high recall value. This can be a further screen for short listing your choice of scrips.

By following these steps, you stand a fair chance of making promising investments. However, this is just a first step in your investment planning. Once you have set your eyes on a select list of companies, you need to monitor all the news that shape the performance of the scrips. For instance, if one of the companies in your list plans to introduce a new product in the market, it would be worthwhile to study the relevant write-ups that have been published on the subject and anticipate the impact the product launch may have in the bourses.

Similarly, if a company announces that it's recalling a product and its stock drops 15 per cent on the news, you might do well to investigate whether the market has overreacted. If so, this could be a good time to invest in the company (providing that it was and is a strong and growing company, with its financial house in order).

But, company news has its own limitations. It may originate from a cocktail party chatter or even a message board that is overflowing with exuberance. However, you could test the veracity of the news by monitoring the information flow in various publications and mediums. Ideally, you should evaluate the news against the financial background of the company. The financials will anyway provide the big picture on the company's health and its likely performance in the stock market.

Much of this information is now available on the Internet. So, once you are online, you can acquire news, financial snapshots and estimates of future earnings of your select companies.

In your research endeavor, we suggest that you focus your attention on the annual report of the companies. The annual report has three main components: the Income Statement, the Balance Sheet and the Statement of Cash Flows.

The Income Statement shows how much money the company made over the last year and its profit margins. The Balance Sheet reveals how much cash, inventories, and debt the company has. And, the Statement of Cash Flows reveals how much money the company is really making, as it works through operations, makes investments, and borrows money.

Moreover, when studying a company's financial statements, you should be able to determine how the company is financing its growth, whether it has taken on too much debt, how much profit it is making on its products and services, and so on. This will give you a fair idea about the company's financial health and how best its compares with its industry peers.

Analyst reports are another valuable source of information on specific companies. Most companies are examined and analyzed by one or more financial analysts. These professionals, most often employees of brokerage houses, write reports that include the analyst's opinion of the stock as well as estimates of future earnings and other projections. Some of the most valuable information in the report are the estimated earnings per share figures. By matching the analyst's quarterly estimates against the quarterly earnings announcements as they come out, you can determine whether the business and its profits per share are meeting, exceeding, or under-performing the analysts' expectations.

Number-crunching isn't the only way you can size up a company and its performance in the stock market. The role of the top management is also critical to the long-term success of individual companies. Therefore, as an investor you would also be well-advised to look at the profile of the top management of the company in focus, track records of the key managers and the internal management policies of the company.

The road map on stock market investing as given above may give a first hand impression that the exercise is arduous and long-winding. But, we believe this groundwork is most essential for a profitable, long-term venture in the stock market. And, of course, we are sure that somewhere along you will realize that it is truly enriching to be on the learning curve while exercising your investment options.