Many experts suggest that people should invest in those companies that are very low in the bourses currently. But if they are low in such a bullish market it means either these shares are not traded heavily or these companies are in the dying stage and waiting for a turnaround.
There have been stocks like this in the past that have done well but does this concept hold true for retail investor who invests his hard earned money into the stock market? I would say no at the initial levels.
Some examples of these companies are Arvind Mills that was trading at 5-6 Rs a couple of years back and Sail. No doubt these are case studies of great turnaround but does the small investor really have all those pieces of information needed to know what makes for a good turnaround. No, absolutely not. Many small people had invested their money in HFCL at around 800 levels on the news that some Australian company has elicited interest in the company. It was only a rumor because neither the Australian company buy any stake in the company nor did any other event happened except that the news of a big collusion was revealed and people lost their money. So, it is very difficult for the small investors to get true information behind the picture. One needs to understand that he does not have huge money that FIIs or big domestic houses have and do not have access to the financial information that other institutions can access. In such a swampy scenario, it is advisable for the small investor to look for stable and solid companies that can provide stable though lower return. At least the return should meet the investor’s expectations provided they are reasonable. Even then if the small investor wants to make some investment in these risky firms, we have a piece of advice. In the first instance, invest your full money in the stable stocks. When you have made quite good money, you can withdraw a chunk from them to invest in these firms. In this case, even if one loses money that will be limited. Secondly, he will be making a loss in the profit as compared to an absolute loss. An example of this could be given now. Say, an investor had 20000/- Rs to invest in stock market. He should be investing all of this money in the blue chip companies that provide him stable money. Say, after a year, his investments become 25000. He can now churn his portfolio and invest a chunk of the profits say, 3000/- in the risky firms. Now, even if he makes a loss. This will be out of profit of 3000/-, not among the first 20000/- that he had invested. This explains the point very well. This has one more benefit. He can view his investments in the risky stock and if it becomes profitable, he can decide to plough in more money depending upon his expectations from the market.
The author can be reached at sandeep1078@yahoo.com
