Sinful stocks

A few days back, one of my acquaintances, a lawyer by profession, wanted my guidance in investing in share market. His inclination towards the share market grew when he observed many of his fraternity members unprecedentedly tracking stock market movement  as they have invested in various shares.

Having no clue about the structure and operational mechanism of the stock market, he was keen to gather knowledge about the means and ways about the equity investment. However, he was more concerned about the social values; questioning if the investment in share market benefits society.

Through his series of queries, I could get he was showing concern about ‘sin stocks’ and wanted to know about the opportunity of investment in shares which are contributing to the growth and development of society ethically.

 “Our investment should not multiply in the share market by exploiting human weaknesses and frailties.It should not puncture our moral consciousness and diminish our social values,” summed up the acquaintance.

Before deliberating upon the concept of ‘sin stocks’, let’s have a look at the current scenario where we witness appetite of people growing towards the equity market. Covid-19 induced lockdown among other things has triggered a change in investment behavior of the people. As most of the traditional investment routes, for a common man, got locked due to uncertainty driven by the coronavirus pandemic,  an interesting scenario has emerged where people are showing unprecedented inclination towards the equity markets.

This includes a huge section of first-time investors venturing into the share market with a hope to get better returns when crisis has deepened almost in all economic sectors.

Let me speak in the local (J&K) contest where more people have taken to investing directly in the stock markets ever since the pandemic set in. There is a huge surge in demat account opening which may have surpassed the overall demat account growth figures of 2019. Notably, at national level, as per the statistics of the largest stock market broker Zerodha, over 750,000 new demat accounts have been opened since the end of February.

Now before listing certain things which investors are required to know while entering in the share market, let’s have a look at ‘sin stocks’.

What are these sin stocks? 

The Investopedia dictionary defines a sinful stock as: “Stock from a company that is associated with (or is directly involved in) activities considered unethical or immoral.” The thing with ethics and morality, however, is that there is no universally accepted definition of what is or what is not ethical or moral. However, there are some sectors of the economy that are generally considered sinful, such as gambling, alcohol, tobacco, and even defense industries.

So, the most common sin stocks include companies that deal in tobacco, alcohol, gambling and other products considered inappropriate to the social well-being of a society. Even stocks of companies manufacturing weapons and other military equipment bearing capacity to eliminate humans are also put into the category of ‘sin stocks’.

However, the list of ‘sin stocks’ can be stretched depending upon the response of investors. Sin stocks can mean different things to different investors.

Why is it risky for a person to go directly into the market?

Many investors enter share market with the intention of making quick money. It has been observed that they are lured into direct investing through TV debates and other media which only talk about the success stories. Nobody talks about those who lose all their savings in the stock market.

An investor should have thorough knowledge about the company before investing in its shares. Picking the right stocks requires research and analysis. Before you start investing, it’s important to understand the basics of equity investments such as risk-reward ratio, how to analyze the financial reports of a company, different types of shares, methods of investing, diversification, and so on.

This requires both, time and knowledge. Most of the investors don’t have patience to acquire these basic things about a company before investing in its shares. In absence of such knowledge, the investor is exposed to high risk and chances of losing the money are always loom large.

So it makes sense for retail investors to go for mutual funds which are run by professional fund managers. These fund managers will help to pick suitable stocks and help you invest in different stocks instead of only a handful of them.

Very few people are successful with direct investing on a regular basis.

What should investors plan to do in this pandemic induced crisis?

Let me reproduce what market experts opine. They say this is the time to start allocating fresh money to equity or shift money from debt to equity because investments in times like these make more money. But do this gradually – ideally by a weekly STP over the next 8-12 weeks.

If you have 3-year plus horizon, this is the best time to invest in a staggered manner. Invest your 25% now and invest 25% each at every 500 points fall in Nifty. If those who never invested before, invest in bear markets like this and hold, they could get good returns in long term.

There some experts say investors can go overweight in equities now because the market will be at a much higher level once we come out of Covid-19. Therefore, this is a great time to invest,” says Reddy. Others while putting necessary caveats agree that this is the time to get overweight on equities, provided that money is not needed for the next five years. They advise not go overboard.

What’s the precise path an investor should follow?

To find a perfect path, the basic thing investor should do is to have a look at his tolerance for risk. If an investor is risk adverse, meaning the thought of losing money or making a wrong decision is very upsetting, he should stick to dollar-cost-averaging (DCA) approach.

What’s Dollar cost averaging (DCA)?

It is an investment strategy that may be used with any currency. It takes the form of investing equal amounts regularly and periodically over specific time periods in a particular portfolio of stocks. This way, more shares are purchased when prices are low. Even fewer shares are purchased when prices are high. This strategy lowers the total average cost per share of the investment portfolio, giving the investor a lower overall cost for the shares purchased over time. In our own terms of currency we call it rupee cost averaging. By sticking to this strategy, you don’t have to worry about what the market is doing.