With the BSE Sensex at an all-time high -- and many of the stocks too on an all-time high -- is it too late for you to enter the stock market?
Have those of you who have sat on the sidelines missed making a profit on the bull run?
We have been flooded with queries from our readers and we've decided to answer them in a two-part series.
Today, we explain the situation that is currently prevailing in the stock market.
Tomorrow, we will tell you how to select which stocks to buy in these circumstances.
Nothing worries this market
There's absolutely no doubt that the market is on a bull run.
In recent weeks, it has ignored all bad news. That's typical of a strong bull market.
1. Crude oil prices have hit the roof and the market has ignored this record high. Such a rise in the price of crude oil is normally fuel for inflation. Since it causes the prices to rise, it will eventually hit company profits.
2. It has scorned the tough talk by the Left about putting a stop to government disinvestments (when the government sells the shares it owns in a company), especially in Bharat Heavy Electricals Ltd. This allows other investors to buy shares of the company so it is no longer a government-owned or public sector enterprise.
3. It has overlooked the not-so-good quarterly results (how a company fares in three months) reported by some companies.
4. It has not been too bothered about the damage that will be caused by the ONGC fire. To read more about the fire at the Oil and Natural Gas Corporation oil drilling platform, read What really caused the ONGC fire.
5. It has remained optimistic despite the massive damage caused by the rains in Mumbai and other parts of the country.
Why are the markets so cheerful?
The reason is simple -- it's raining money in the stock market.
In July alone, Foreign Institutional Investors have bought over Rs 6,500 crore worth of Indian stocks.
Data from international equity funds (foreign based private funds and mutual funds that invest in shares across the globe) show India has become a hot favourite with global investors. Dedicated India equity funds (they only invest in the Indian stock market) now account for the lion's share of funds that invest in the Asia Pacific region.
Plenty of money has been raised in Japan for investment in Indian stocks.
Clearly, India has arrived in a big way on the global investors' radar.
The flipside to that, of course, is that the markets will fall when the foreign money stops coming in.
When will that happen?
Nobody knows.
Some say when interest rates rise in the US, the foreign investors will pull out their money and run there.
Others believe a stronger dollar may do it. International investors prefer investing in a strong currency.
Let's say $ 1.32 = 1 Euro.
If the value of the dollar falls until $ 2 = 1 Euro, it means the dollar has weakened and the Euro has strengthened.
If the value of the dollar rises and $ 1 = 1 Euro, then the dollar has strengthened and the Euro has weakened.
So, if the dollar strengthens, investors will pull their money out of India and move away.
Many analysts believe that the market will slow down if valuations (this refers to the worth the market places on a particular stock) become too high. This would mean the prices paid for the stocks are much more than what they are worth. Investors at this time will tend to back off.
The economy
There's hardly any doubt that the economy's overall growth is good, with a double-digit rise in industrial production and manufacturing.
Exports continue to do well. Many companies are expanding their production capacities. For instance, the order books of engineering companies are full.
The April-May-June quarter results of most companies have been very good.
What a stock market investor must know
What matters to the market is not just whether a company is doing well, but whether its performance is already priced in the stock.
For instance, the price of a stock may keep rising because investors believe its performance will be great. When it declares its results and the performance is great, the price will not shoot up because the investors expected it.
If you are using stock jargon, you will say the market has factored in the good news.
On the other hand, if the investors were not buying a stock because they believed it would not do well, the price of that stock will not increase. If the company does well, it will surprise investors who will then run to buy the stock causing the price to increase.
In short, it's only an unexpected spurt in earnings and profits that moves stocks. When valuations are high, it means the good news about the company is already 'priced in'.
It all depends on when you manage to get hold of the shares. To help you do that, we will be carrying an article tomorrow on
how to select a stock in today's market.Meanwhile, you can invest in today's market provided you play cautiously. Here are some pointers that should help:
1. Do not depend on market gossip or rumours -- you need to study a company carefully before you invest in it.
2. Do not try to make a quick buck or run to invest in mid-cap companies because there is money to be made there. You could get badly burnt.
If the number of shares in a company is multiplied by its current price, the result is market capitalisation. Based on this, companies are classified as large-cap, mid-cap and small-cap.
3. Be prepared for change. It's useful to remember that when liquidity flows ebb, valuations too take a nose dive. What this means is that once the worth the market places on a particular stock falls, the price of the stock falls too.
After all, FII flows slowed down in April because of fears about global concerns and not because Indian companies' earnings were weak, or because they were overvalued.
4. Keep a wary eye for any reduction in FII inflows. Make sure you monitor these inflows (they are available daily in every financial newspaper) and head for the exit at the first signs of the inflows slowing down.
All the best!
Tomorrow: How to select stocks in today's market
Illustration: Dominic Xavier
