Investing in the stock market is said to be very tricky, but with proper knowledge, planning and understanding, it can help you to multiply your money.
When it comes to investing in stocks, there are many market myths associated with it that are wild spread across and many people follow them blindly. What are these myths and how did they build up in first place?
So, to wipe out these “false myths”, let us evaluate and analyse them in detail.
Investing in blue-chip stocks:
People often consider the stock price while purchasing a stock and not the market-cap. If a stock costs below Rs 100, then the perception is that it is a penny stock and if the stock price is above Rs 1,000, then it is considered to be a large-cap stock, but, that is where most people go wrong.
For example – the stock price of Marico was moving in the range of Rs 338 in the last week – but it has a market cap of Rs 42,000 crore. While a stock like Laxmi Engineering which is priced around at Rs 3,200, has a market cap of around Rs 3,000 crore.
Hence, don’t look at the stock price as the ultimatum while picking a stock. Thus, while opting to invest in a stock, choose quality stocks and let growth perspective and valuation be the determining factor.
Dividend – the right barometer for choosing stocks
Companies announce dividend which may be as high as 500 percent or 1000 percent. Investors get mesmerised by such numbers, thinking that the dividend given by the company is huge.
If a company has given a 200 percent dividend and the face value of the shares is Re 1, it means the company is giving 200 percent of Re 1 as dividends to a shareholder, which is Rs 2.
Hence, if the stock price is Rs 100, then actually you are receiving just 2 percent of the price you have paid. Hence, don’t be misled by big numbers, get a reality check first.
Myths to counter before investing in stocks:
There is significant market chatter on maybe the mid-caps are set to outperform, some say commodities will rise, others mention that large-caps are here to stay.
Firstly, while investing in stocks don’t ever stick to a blanket rule i.e. XYZ category of stocks work and others don’t. Secondly, do your research right and look at stocks that promise and deliver on growth.
Few points to be on the lookout for before investing in stocks are:
• Established business
• Quality of management
• Future prospects
• Insulated from competition
Don’t scare away from investing in the stock market. Analyse the stock thoroughly and then come to the conclusion about investing in it, based on your financial potential.
Proper research and learning from the mistakes that you made will help you to tackle any false beliefs related to the stock market. Clear all your doubts and don’t end up regretting the opportunity lost.
(The author is Head, Personal Wealth Advisory, Edelweiss)Disclaimer: The views and investment tips expressed by investment experts on moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.