Investment Mantra: Three things to look before Investing in the stock

Quality of the management is one of the key aspects to consider before investing in a business. Look for stability in management, and for leaders with strong backgrounds in the industry and a good record of success in other companies.

Jun 14, 2018 07:06 IST IIFL Derivative Desk Raushan Kumar |

1. Business:
A business model is essentially the strategy that a company uses to maximize its profit in its industry. The investor needs to invest, where company generating "Free Cash Flow"

2. Management:
Quality of the management is one of the key aspects to consider before investing in a business. Look for stability in management, and for leaders with strong backgrounds in the industry and a good record of success in other companies. Focus on those company where corporate governance is held.

3. Valuation:

Valuation is an art. It can be done by three Business Valuation Methods.
  1. Asset-Based Approaches: It can be done on a going concern or on a liquidation basis.
  2. Earning Value Approaches: The most common earning value approach is Capitalizing Past Earning.
  3. Market Value Approaches: It attempts to establish the value of the business by comparing to similar businesses.
Remarks:
Investing in the stock market is the only best ways to grow wealth and reach long-term financial goals. The investor will typically make profits in equity only in the long-term. So, the combination of Business, Management, and Valuation put together gives you portfolio. But for the small investor who have little skills or time to manage a personal portfolio. Mutual funds are a better vehicle. Currently Indian Market is in the election cycle, where "Political Risk" persist and fear of rising interest rates risk is also high.

"Interest rate futures" can be used to take cover against the risk to the investor portfolio arising from interest rate volatility.  If the investor is worried about the bond yield moving higher, by short bond futures so that the profit from the hedge can help cover the erosion in fund value. For example, if an investor holds debt mutual funds(long duration) worth Rs6 lakh, the investor can sell three lots of NSE bond futures.

And in election cycle, equity hedging portfolio strategy can help avoid losses, or reduce them, if the market falls. This can be done by Buying "LEAP year put option" against equity portfolio to protect deep losses. But it is not easy, as it requires expert skills to analyze implied volatility, delta, time decay and assignment risk. Hence, traders and investors are advised to implement these unique strategies only after realizing their risk management through a Derivatives expert. 

Save prudently.....Invest and manage even more wisely.

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