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Market correction: An opportunity to amass good stocks

Monday, September 3, 2007

The stock markets are going through a consolidation phase from the last couple of weeks. Both the Sensex and Nifty have fallen 12 to 13 per cent from their peaks. This correction was triggered by the global markets. Recent volatility in the global markets is attributed to the crisis in the sub-prime lending market in the US and some negative news in the political circles here. Investor sentiments were negatively impacted and it triggered a sell-off in the stock markets.

The markets have been quite volatile with a negative bias in the last couple of weeks. But if you take a medium to long term view, this again seems one more correction or consolidation phase in our long-term bull market. The positives are still intact and the India Inc story remains quite good. In fact, investors can use this correction as an opportunity to enter or accumulate fundamentally good stocks. These are some factors that investors should analyse while identifying stocks for their portfolio now.

Macroeconomic factors

There are some general macroeconomic factors that influence the markets. The market generally reacts to global developments. Usually, these global factors are positive for some sectors and negative for others. Investors should look for sectors that have seen a positive effect based on these developments . For example, a problem in the US economy will have a negative impact on the export-oriented sectors like IT, textiles etc. A rise in crude oil prices will have a positive impact on oil exploration companies but adversely impact oil marketing companies.

Industry factors

These are the factors that influence a particular sector or industry in the market:

Actions or announcements by the government
General market conditions (generally demand is good/not good or a raw material shortage)
Cyclical demand in some industries

Business factors

There are some factors that are specific to a particular company. Most of the time investors end up looking the past performance of the company (PE ratios, percentage growth from past etc). The key is in looking the potential of the future. What are the revenue and profit projections? How full is the order book of the company ? Is the company investing in any future expansion projects?

Background of the senior management team of the company is relevant too. The past track record and consistency in maintaining profit margins, cash flows, and book value should be analysed. The dividend distribution record of the company should be checked too.

Here are some basic guidelines for investors planning to put their money in the stock market:

Identify stocks

You should identify fundamentally good stocks based on your investment objectives. You can take some advice from your stock broker or research and find stocks for your portfolio. Usually, it is advisable to identify 5-8 stocks for an individual portfolio.

Buy at a good price

Since market conditions are quite volatile, it's advisable to buy/accumulate the stocks in smaller quantities at every buying opportunity in the market so that you get a good average price and you do not get locked into a wayoff price. Don't hurry to invest your full corpus in one day.

Profit target

Always have a profit/loss target in mind. Once the profit/loss target is achieved, analyse your investments and decide (take profit, take part profit, book loss, book part loss, revise the target) based on proper analysis. Often investors fall into a trap by not taking profit/loss once the target is achieved.

Track your investments

Trading in the stock market is 'active investing' . You have to keep a constant watch on your stock market investments (at least once 2-3 days). If you cannot afford to do that you will be better off investing in mutual funds with a good track record of outperforming the markets.

Posted by FR at 9:11 AM  


very nice article

Anonymous said...
September 3, 2007 at 10:17 PM  

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Investment in equity shares has its own risks. Sincere efforts have been made to present the right investment perspective.The information contained herein is based on analysis and up on sources that we consider reliable. I, however, do not vouch for the accuracy or the completeness thereof. This material is for personal information and I am not responsible for any loss incurred based upon it.& take no responsibility whatsoever for any financial profits or loss which may arise from the recommendations given in this blog.