Now that we have decided to invest in five sectors instead of one to reduce the chances of losing money in the stock market, we have to select stocks in these sectors to invest in.
Stocks are broadly classified into 3 groups. Large Cap, Mid Cap and Small Cap stocks.
These are the really huge companies like Reliance. These are so big that they cannot possibly give very high returns, simply because they have become huge by tapping most of the market wherever they can sell their goods. Significantly increasing sales is a difficult task. They will grow by 10 to 12% each year steadily. The biggest positive for such stocks is that though the year on year increase will not be much, any drops also will not be much. Also, since a large volume of their shares is being traded in the market at any given time, manipulating the stock price is impossible.
These companies are slightly smaller than the Large Caps. These companies are expected to grow faster than the Large Caps as they spread themselves into newer markets and increase sales. Growth at 20% or above is common. However, the chance of the share price falling is also higher. One invests in these companies expecting them to grow into Large Cap companies and give great returns over the long term. The share price is difficult to manipulate. One should invest in these shares for a chance of higher growth at a slightly higher risk than with Large Cap shares.
This is the interesting segment and it is in this segment that fortunes are made and lost. This is where companies have just a few crores worth of shares in the market. There have been numerous cases where a few investors have gotten together and picked up a large chunk of shares of Small Cap companies,causing the stock price to rise because of lack of shares in the market and publicity for the company courtesy of ‘helpful’ media. When the prices go up significantly, they off load their shares. This is a typical ‘Pump and Dump’ strategy. One buys stocks in such companies in the hope that the company will become a MidCap company then eventually a Large Cap one and the returns will be phenomenal.
The difference between the three groups has only recently been clearly defined by SEBI according to their market capitalization. Market capitalization = price per share x no. of shares of the company. The large caps are the largest 100 companies on the stock market, the mid caps are the 101 to 250 and the rest are small caps.
Now that we know the different categories of shares within a market sector and the risks associated with them, how to select which share to buy? Generally, we decide on a tip from a friend or broker, which, most likely, will be disastrous. To actually go through the list and find a share that has great prospects, financials, and has a good chance of giving good returns, one has to put in some study. It is very lucrative if one decides to put in the time and effort. What about those who do not have the time or aptitude to do this? For them, Mutual Funds are the answer.