Identifying the Right Stocks and Sectors: In another blog of Fingrad, we mentioned that investing is buying a portion of the business in the form of shares. As the business grows, so does your net worth. To pick the right stocks, you first need to find the correct companies, which then turn to pick the right sectors.
Nobody would like to invest in a company whose business is hard to understand and even harder to explain. This blog will take you through the right ways of identifying the right stocks and sectors for investing.
Ways of Identifying the Right Stocks and Sectors
To understand the sector-wise approach to investing and research, you’ll need to understand the Top-Down Approach to invest.
Tip – Remember to only invest in sectors that you can understand, especially the business model of that sector.
The Top-Down approach takes a look at the economy first before even considering the option of investing. If the economy is booming, then there’s a good chance that a majority of the stocks are overvalued and the stock market will be going through its bull run.
So when the market performs well, you’ll want to buy potential big winners in the upcoming years. Even within the bull run of the market, there will be booming sectors that could explode in the upcoming years.
A bear market opens up opportunities to grab blue chip stocks that are fundamentally strong at discount prices. The stock of the company is bound to go up eventually, and until the next bear market, you might miss out on an opportunity to grab stocks at such low prices.
Besides this, even in a downturned market, if you look close enough, you’ll find some sectors performing better than the market. But, how do you recognize such sectors before they blow up?
1. Multiple Time Frames
To get a better idea about sectors, investors can use charts for different sectors and check their historical performance. The charts show trends per sector or industry, across different time frames. The three main time frames in discussion – are primary, intermediate, and short-term.
The Primary trend shows if the entire sector is on a falling spiral, or if it’s bound to grow in the next few decades. A weekly or monthly chart helps you keep track of precise fluctuations, either an uptrend or a downside.
Even daily charts are available not just for stocks, but the sectors of those stocks as well. Here’s how you can use these time frames –
Long Term historical performance of the industry. Long story short, the primary trend shows you where the industry has been going, and the potential to grow in the future.
Daily, Weekly, and Monthly (Intermediary and Short-term)
Why would daily and weekly sector research be important to a long-term investor? Especially if you’re investing for the long term?
The answer is simply timing – Studying the sectors regularly through charts can help you decide your entry levels and exit levels to the hour. This can save you money on commission fees with your broker from making multiple trades over the course of one week or one month.
As an investor, you want the best return on investment (ROI). Even if the market is doing very well, you’ll want your personal investment to outperform the market and give you better-than-average returns. For example, if SENSEX is growing at 6% and the IT Index is growing at almost 15%, then it’s clear which sector is more attractive to you as an investor.
The process of sector-wise research is similar to stock research. In each sector are the top performers of the industry.
By going through different time frames, you can check which sector is performing better now, as well as historically over the years. The time-based trend that you choose to study, decides the investment goals you have already.
Portal allows you to pick stocks per sector, without having to search for the companies yourself. You can add stocks to Buckets and compare them with other companies as well, irrespective of their sectors.
2. Special Cases
An expensive stock is not necessarily good because the shares are on par with large-cap companies and a stock trading at low prices is not necessarily bad either. Smart investing is looking beyond the price of the stock and taking a deep dive into the company’s financials, and an even deeper analysis of the sector of that company as well.
To make multifold returns cannot be guaranteed under any circumstances. Especially in a volatile market like today. But a sector-wise approach can assure better than average and better than market returns.
If you see a sector in your portfolio underperforming over a primary time frame, then you could actively consider rotating sectors. When the cycle of a sector is coming to an end or changing in a different direction from its usual movement, then it is time to consider shifting sectors.
Sector-wise study of stocks pays off in the long term and can make you a skilled investor who might be able to find opportunities even in times of market volatility. The objective is to outperform the markets and get better than average returns. You can do this by identifying the best-performing sectors and observing the time frames of the industry.
That’s all for the article on Identifying the Right Stocks and Sectors, we hope you liked it! Want to know more about stock market sectors to invest in? Check out the webinar by Varsha Chandnani on the right market sectors. Happy Investing!