What to Research before Investing in the Stock Market (Institutional Equities)

Infosys’s stock carried an issue price of only Rs 95 per share soon after it had been listed in 1993. Driven by sound corporate governance practices and large deals, the Bangalore-based startup has evolved into an IT major as we know today. The company’s stock has since increased several fold over the last 26 years. An investment of Rs 10,000 in Infosys shares back in 1993 would be worth more than Rs 2 crore today!    

If investment in equities brings such cool returns, why are average investors often hesitant to try their luck in the stock market? Investors assume that the sentiments driving institutional equities are largely unpredictable. Stock prices, they feel, sometimes turn out to be really good and at other times awfully bad. Again, for a lot of investors, equity is a relatively unfamiliar financial instrument and the one that seems to be loaded with risks.             

It’s true that a stock’s past performance is not an indicator of future results. However, fundamental analysis of stocks by equity firms in India has evolved significantly over the years. Moreover, contemporary stock market research is backed by technical analysis software, and this is capable of generating various outputs like 5-day to 200-day moving average stock prices, Fibonacci retracement levels, candle stick charts and more. Therefore, it is certainly possible to identify companies that can deliver superior investment returns on a continuous basis.

While there is no sure-shot method to foretell which way institutional equities are likely to move in the future, there are some points to keep in mind while investing in them. Investors have made significant profits from investments in Sun Pharmaceutical, HCL Technologies, Wipro, and TCS, apart from Infosys. But as they say, "It's easy to know the right thing to do after something has happened.” The “right investment decision” is not always a conscious decision; it is a combination of predictive math and gut feeling. Also, for every success story, there are a good number of stocks that have failed investors in the long run. Investors rarely make all their money from a single stock, and this is contrary to what social media would have us believe!

There are multiple factors influencing stock movements like the demand for product or service and how accessible it is for the end user. For instance, in a fragmented mobile landscape, is a certain app accessible to consumers across devices, operating systems, and geographic locations? How easy is it for competition to replicate a product or service? Or, are there healthy barriers to entry around the product or service to keep out the competition? These include proprietary technology, continuous innovation, high investment, and strong channel partners. How intense is the competition? Is there a price war? Or have prices in the market stabilized more or less? These are just some of the questions to ask. Above all, it is important to consider the brand’s visibility and online reputation.

A startup may have a great idea but it takes the right kind of management to get this off the ground. Hence, the expertise of the leadership team, dedicated category-wise sales teams, and employee satisfaction and turnover are some elements to weigh in while picking a stock. Screening for positive cash flows is a common method that analysts employ to get a measure of a company’s worth. The company’s plans for capacity expansion, increased coverage in tier-2 and tier-3 cities, and average revenue per consumer/unit are other factors to consider.

Generally speaking, the average individual investor is not privy to much of this information, which means she/he must work closely with investment advisory companies.