Hello readers, we are happy to announce that our team of MoneyWiseMind.com launched a new section “Investing Insights: Weekly Q&A for Stock Market Newbies”, to spread the basic stock market knowledge to the beginners.
This
is your go-to resource for demystifying the stock market from the scratch. Each
day, we will present 10 carefully curated questions with answers that will
cover essential concepts, strategies, and terminologies. Whether you have just
entered into the market, or trying to starting your stock market journey, or
looking to strengthen your foundation, our weekly post will guide you through
the basics and beyond, making investing accessible and understandable for
everyone. Happy reading.
Day 43: Basic Stock Market Concept
How to Analyze a
Company’s Cash Flow Statement?
A cash flow statement shows how money moves in/out of a company. Focus
on three sections:
Operating
Activities:
Cash from core business (e.g., TCS earning ₹10,000 crore from IT
services). Healthy sign: Positive cash flow here.
Investing
Activities:
Cash spent on assets (e.g., Reliance buying machinery for ₹5,000 crore).
Warning: Consistent negative cash flow may mean overspending.
Financing
Activities:
Cash from loans or dividends (e.g., Infosys raising ₹2,000 crore via
bonds).
Key Metric:
Free Cash Flow** = Operating Cash Flow - Capital Expenditures. Companies
like Nestlé with consistent positive free cash flow can reinvest in growth or
pay dividends.
Beginner Tip:
Use tools like Screener.in to compare cash flow trends over 5 years.
Avoid companies burning cash (negative free cash flow) for more than 2
years.
Why Does Corporate
Governance Matter?
Corporate governance refers to how a company is managed ethically.
Strong governance includes:
Independent board members (not family/friends of promoters).
Transparent financial reporting.
Fair treatment of minority shareholders.
Example: HDFC Bank is praised for its independent board, while Yes Bank
faced crises due to poor governance.
Red Flags:
Promoters holding > 50% of shares.
Frequent auditor changes.
No whistle blower policy.
Action: Check SEBI’s website for governance violations before
investing.
How Do Mergers and
Acquisitions (M & A) Affect Stocks?
Mergers and Acquisitions or M&A can boost or hurt stock prices
depending on the deal:
Good Acquisition: Buyer gains new technology/market share.
Example: Hindustan Unilever buying GSK’s Horlicks boosted its
health-food segment.
Bad Acquisition: Overpaying for a struggling company.
Example: Tata Motors’ Jaguar purchase initially caused
losses.
Impact on Shareholders:
Acquirer’s Stock: Often dips short-term due to costs.
Target’s Stock: Usually rises due to buyout premiums.
Action: After M&A news, study the deal’s financial terms and
long-term strategy. Avoid impulsive trades.
Should You Add Gold
/ Real Estate to a Stock Portfolio?
Gold and real estate balance stock market risks:
Gold: Rises during crises (e.g., 20% surge during COVID). Allocate 5–10%
via gold ETFs or sovereign bonds.
Real Estate: Provides rental income but is illiquid. Use REITs (Real
Estate Investment Trusts) for easier exposure.
Example Portfolio:
60% Stocks (Nifty 50 ETF + blue chips)
25% Bonds (PPF, corporate bonds)
15% Gold (ETF)
Why It Works: In 2022, when stocks fell 10%, gold rose 8%, reducing
overall losses.
How Does “Analysis
Paralysis” Hurt Beginners?
Analysis paralysis happens when you overthink decisions and never act.
For example, a beginner might research 50 stocks but never invest.
Fix It:
Start with index funds (no stock-picking needed).
Limit choices: Pick 3 sectors you understand (e.g., tech, FMCG,
banking).
Set deadlines: “I’ll invest ₹5,000 in one stock within 7
days.”
Why It Matters: Delaying investments costs compounding growth. ₹10,000
invested at 25 grows 8x more than the same amount invested at 35.
Why Should Beginners Track Their “Investment Temperament”?
Your temperament (patience, risk tolerance) shapes success more than
stock picks.
How to Track:
After each trade, note your emotions (e.g., “Sold X stock due to fear of
loss”).
Example: If you panic-sell during 5% dips, avoid volatile stocks and stick to stable large-caps.
How Does Social
Media Hype Distort Beginner Decisions?
Viral posts about “100x returns” create unrealistic
expectations.
Red Flags:
Influencers promoting unknown penny stocks.
“Get rich quick” schemes with emoji - filled messages.
Action Plan:
Mute stock-tip accounts.
Follow only SEBI-registered advisors.
Verify claims: If a You Tuber says “Stock X will double,” check its financials first and do your own analysis.
Why Should
Beginners Learn “What Not to Invest In”?
Avoiding losses is as important as chasing gains.
Skip These as a Beginner:
Futures & Options: Requires advanced timing.
IPOs with no profits: E.g., Paytm (IPO: ₹2,150, now ₹800).
Stocks with >200 P/E ratio: Overpriced relative to
earnings.
Action: Create a “Not to Buy” list and review it monthly and quarterly.
How to Invest
During Family Financial Pressures?
Family emergencies often force bad decisions.
Plan Ahead:
Keep 20% portfolio in liquid funds (instant access).
Explain investing to family: “This money needs 5 years to
grow.”
Avoid mixing family loans with investments.
Example: If pressured to withdraw for a wedding, offer partial help from liquid funds, not stocks.
What is Sector
Rotation, and How Can Beginners Use It?
Sector rotation means shifting investments between industries based on
economic cycles:
Recovery Phase (post-recession): Auto, real estate (people spend
more).
Peak Phase (booming economy): Tech, luxury goods.
Recession Phase: Utilities, healthcare (stable demand).
Simple Strategy: Invest 70% in diversified index funds (auto-rotates sectors) and 30% in 2–3 trending sectors. Example: During COVID, healthcare stocks surged, while travel stocks crashed.
If you have any
other questions in your mind relating to stock market basics or need any
clarification, please put your query into the comment box, We will try our best
to clarify the same
Disclaimer:
The information provided on MoneyWiseMind is for educational and informational
purposes only. It is not intended to be financial advice, and you should not
rely on it as such. Before making any financial decisions, you should consult a
licensed financial advisor.
