Investment matters

Fallout of the COVID-19 pandemic has been rolling out many stories to share as the norms of living are undergoing transformation unabated. Among many incidences, consumer behavior is developing almost in contrast to what it used to be in pre-covid times.

It’s the spending pattern which has been experiencing a major shift as consumers are very rarely spending on non-essentials. In pre-covid times, consumers especially zillennials and millennials were throwing their money on maintaining their lifestyle patterns. Notably, Zillennials are individuals born between 1996 and 2015 and young millennials are those born between 1990 and 1994.

Now it appears that the covid-19 crisis has forced them to cut down their lifestyle expenses drastically. An interesting shift in their behavior as consumer has been noticed as more and more young ones have been looking at profitable investment avenues to have a financial buffer at their back at the times of crisis like the present one. In fact, the present crisis still remains uncontrolled and no one sees an immediate end to it.

Various online investing platforms have a data which shows the young ones in the above mentioned categories are now more bothered about their financial security  than on maintaining their luxurious lifestyle. There has been over 400% increase of such investors after the outbreak of coronavirus pandemic.

For example, a financial services platform, Zerodh,  reported that between March and July 2020, it had more than 5,84,000 customers between 20-30 years of age compared to 1,23,000 investors in the same age group during the same period in 2019. The company witnessed a similar trend on its mutual funds platform called Zerodha Coin.

In succinct, this breed of younger generation with negligible financial liabilities to meet, are now more inclined to save and invest more as non-essential expenses have gone down ever since the covid-induced lockdown. They continue to earn, while their expense on travel, restaurants, luxury purchases and entertainment have gone down considerably.

When we look at the changing bevahoiur on consumers in our own region (J&K), we find it similar to the national scene. Our young ones, zillennials and millennials, too have developed an appetite for investing their savings on multiple platforms.

Many have already joined the bandwagon by taking the route of stock market and parking their money in various shares. There is a good number of such new investors who have posted several queries about the investment matters. Some already stand invested in the equity market and there are others who have shown intent to invest in the market but want some sought of guidance before boarding the market.

For example, an investor has asked about stocks which will be good for investment, some want to know about bonus shares and a group of investors want to know about the dividends paid by the companies to their shareholders. So let’s deliberate upon certain issues which can help an investor to remain alert while being in the market and reap benefits with minimum possible risk.

There are investors who would like to invest in stocks on long term basis (4-5 years). But they are confused when it comes to pick a good stock for investment? How to lay hand on good stocks?

First of all let me reiterate that stock market is always loaded with risks. You can lose money in a jiffy once market is engulfed by an uncertain environment. And above all, investing in stock market is not a sure shot formula to create wealth.

Almost every investor’s dilemma is how to select a good stock for investment. Even best brains in investment matters have failed to read movement of stocks in the market. Sometimes, you will find a cheap stock could be undervalued and overvalued because of some traders betting on a miracle.

Sometimes you come across a highly priced stock and its high pricing may be due to over expectation on factors which are not fundamentally right. Scores of incidents galore about stocks which saw a hype and investors tried to ride on the price momentum only to suffer heavy loss in investment. So keep it in mind that many of those stocks which were booming have fallen from their peaks and investors have suffered losses.

 So, if you are financially savvy you must study and analyse before choosing a stock for investment. Look at the company’s financial statements. Pick stocks from sectors and markets that you know and have experience in.

Some of the factors you must look at before picking a stock are Earnings Per Share (EPS), Dividend yield, Debt of the company, future prospects, strong brand etc.

EPS is the amount of profit the company is making on a per share basis. Market appreciates stocks which have a growth in EPS. One indicator of a good stock to buy is a high dividend yield. Stocks which have a higher dividend yield have better valuation in the market as compared to those with a lower yield.
 Stay away from companies with high amounts of debt when looking for good stocks to buy. As most investors have found out recently, it can be very difficult for companies with large amounts of debt to survive, especially in recessionary times.

Understanding future prospects is important as part of financials. You can identify the factors that may influence the future performance of a stock. Compare your identified list of stocks against its peers in the same industry or sector. It is advisable to invest in a market leader than the second or third rung stocks. And remember, companies with strong brands are likely to perform better in the long run even if they may be less profit making in the short run. Market puts a value to the brands too while valuing a company with strong brands.

In succinct, doing proper analysis and due diligence is an important part of investment. It is always best to buy the highest quality stocks you can possibly afford. Do not be afraid to pay a high price relative to earnings, book value, or sales. History shows that the premium paid for high-quality items of any kind is generally worth the extra money.

And one more important thing is to diversify your investment in different sectors. This will hedge you against market volatility.

Let me also advise you to consult a financial market consultant before making any investment decision.

What are dividends?

A listed company shares a percentage of its earnings with its shareholders. In investment matters these earnings shared by the company with its shareholders are called dividends. Usually a dividend is referred as “Money For Nothing” and is more commonly paid on an annual basis.

During the first part of the twentieth century, dividends were the primary reason investors purchased stock. The companies literally used to attract investors by promising to pay dividends.  Dividend payout is important in the context of company’s reputation and soundness. For investors dividends mean certainty about the company’s financial well-being.

Even as dividends are seen as “money for nothing” by most of the investors, the implications surrounding paying and receiving dividends mean a lot of work for both the company and its shareholder.  Typically, mature, profitable companies pay dividends. However, companies that do not pay dividends are not necessarily without profits. 

As a rule, it is not obligatory for companies to pay dividends to shareholders. It is their free will that whether they want to share profits with shareholders or not. Not all companies pay dividends.

What are bonus shares?

Definition of a bonus share galore on the internet which define it as a free share of stock given to current shareholders in a company, based upon the number of shares that the shareholder already owns. The definition expands it further that while the issue of bonus shares increases the total number of shares issued and owned, it does not change the value of the company. Although the total number of issued shares increases, the ratio of number of shares held by each shareholder remains constant.

In financial terms, as you know, companies distribute some portion of their profits to the shareholders which is known as dividends. They retain a fairly large part of the profit and add it on to the Reserves of the company. Notably, Reserves are back up funds which are kept for meeting unforeseen increases in expenditure and for financing its future expansion or diversification programmes. But when the reserves have more cash than estimated requirement for executing future plans, then companies use these free cash reserves for issuing bonus shares to shareholders. This is done by transferring some amount from the reserves account to the share capital account. And it happens by a mere book entry.

As shareholders do not pay; the company’s profits are also not affected by issuing these bonus shares. What happens is that the bonus shares increase the total number of shares of the company in the market, thereby meaning more free floating shares in the market.

Though, getting bonus shares is a positive development for the investors, bonuses may not necessarily generate free gains for investors. Bonus issue does create a tiny upward and short-lived bias, but for most of the companies this appreciation in price dies in the long run.