Posted by: Arti Bhargava on May 21, 2018, 06.30 AM IST
Ritu is a doctor who wants to invest in equities though she does not understand the markets much. Her only source of information is the media. She has heard that many people, particularly HNIs, made a killing by investing heavily over the past year and a half when the Sensex and Nifty were touching new highs. All this information has generated a lot of optimism in the market and every investor wants to take huge exposure in equities. Should Ritu follow suit?
The prevailing market sentiment is encouraging herd behaviour. During a market boom, investor sentiment comes into play. There is typically an initial period when the equity market rises as the economy does well and profits of companies rise. Investors who spot this trend early on make good gains and are quickly followed by more investors taking the plunge. As the markets continue to rise, more and more investors become greedy and gain the confidence to invest.
As the stock market surges to new highs, retail investors, who missed a lot of the initial rise, become keen to make up for the opportunity lost and jump in. However, Ritu must be mindful of the fact that most of the rise in the market may be on account of a positive investor sentiment, not necessarily backed by the improvement in profit performance of companies. Too many investors plunge into the market after a boom, only to sell in panic when prices fall.
Instead of trying to time the market, Ritu must invest systematically over a period of time. She must also refrain from investing in stocks of small companies, especially when the market is high. Such stocks may be extremely volatile and prone to risk and are suitable for seasoned and informed investors. As a beginner, she must invest gradually in stocks of good quality companies (with stable businesses and strong balance sheets), which entail lower risk.
(The content on this page is courtesy Centre for Investment Education and Learning (CIEL). Contributions by Girija Gadre, Arti Bhargava and Labdhi Mehta.)