Maximise Your Wealth: Think BIG

 

 

The Stock Market is synonymous with wealth creation, and maximisation. Where else do thousands of invested rupees translate into crores and crores of rupees? While this happens regularly, it does not imply that every company you invest in will make a fortune for you; you have to be nimble with your decisions. The sudden momentum and surge of a small company’s stock price may catch your attention, and it may appear such a company will yield returns of above 100%; but this is seldom the case. In a few months or immediately after you have bought the stock, you may realise you have made a mistake, and that the price of the stock falters, drops below and fails to come back to cross the price line at which you purchased it.

On the other hand, however, many people who have invested in the markets for the long term have made huge wealth. So, what are the companies that consistently help investors make big money? And how does one spot these companies? What are the characteristics of these wealth-generating companies? Considering this dilemma and to answer the above-mentioned questions, the first golden rule for an investor seeking to maximise his wealth is: invest only in equities. Second, follow established criteria for selecting the right companies. One of the most important of these is to select companies based on market capitalisation. In a soaring economy such as India’s I feel this one criterion takes care of creating and maximising your wealth, without exposing you to undue risk.

Different valuation tools and investing methods may tilt the odds in your favour, but understanding different valuation tools and other parameters used to guide investment decisions is a complex issue. So, to make things simpler for you, I would like to confine myself to one criteria - market capitalisation of the company - and elaborate on the subject to provide a better understanding of it. There are other diverse elements affecting stock prices, but for the present individual investors need only consider the factors mentioned below. In selecting companies based on market capitalisation it is important to understand that the larger the company’s revenues and profits, the greater the company’s worth is. This is not easy: here one has to bear in mind that companies achieve size and scale only over a period of time. Thus, we can conclude that companies of a larger scale have been operating for several years and have weathered rising and falling markets and fluctuating economic cycles.

One size usually doesn’t “fit-all” and especially not when it comes to the stock market. Choosing the right sized company or fund can be a tricky prospect for many investors. “How are the different levels defined?” and “What are the pros and cons of each type?” are two major questions many people have. In contrast to this, mid- and small-cap companies would have relatively lesser experience. Small cap stocks are companies who typically have a small market capitalisation. Market capitalization, simply put, is the price of the company’s stock, multiplied by the number of shares outstanding. It’s basically the value the market places on a company. With the potential for growth, comes the potential for risk as well. All portfolios should be properly diversified to help reduce overall portfolio risk. Investing is small cap stocks comes with an additional set of risks unique to these types of investments, consequently any money you invest in small caps should be money you’re prepared to expose to these risks. Small cap stocks are also more difficult to research and choose precisely because of their obscurity.

Some investors want the proven reliability of the big names. Others value the large caps because they’ve already experienced their growing pains, and are now established. Many large cap companies also do a great deal of work around the world, which means an added flavor of global diversification. Each type of market capitalisation category comes with its own unique risks and rewards. Trying to balance the risks and rewards of all of the assets in your portfolio can be tricky. Consulting with a financial professional can help you identify which investments may be appropriate for your situation

Apart from this, most large-cap companies have an established track record of earnings (and dividends, bonuses, rights, etc.) because of their loyal base of consumers supporting their products, stronger balance sheets and cash flows and better credit ratings because of their market standing. In most cases, they also have a competitive advantage in the marketplace because of better cost controls, strong marketing capabilities, and so forth. In contrast to this, the non-large-cap companies not only have to compete on a much stronger level to sustain their market position, but they are also subject to higher risks generated by fluctuating industry cycles.

Looking at the characteristics of different sized companies, one thing that stands out clearly is that the larger the company, the lower the risks it faces and the greater its ability to manage challenges. However, while large-cap companies have several advantages, their smaller or newer peers often have the advantage of greater potential growth prospects, as there is a greater possibility that these companies can double their revenues and profits over the next few years. Finding such companies may require a lot of research, and investing in them at the right time and successfully may also require insights into the way the company works, its long-term goals, and the mechanics of the stock market. It will also require patience and a high risk appetite. Thus, the determination of one’s risk profile becomes an important element, and you should avoid such involvement if you are not a professional in this field. Another important consideration if you’re looking to maximise your wealth on the Stock Market is to invest in companies that have distinct advantages over others. One of these advantages is being incorporated in the BSE-100 Index. This becomes clear when you consider that these 100 companies, out of the 6,000 companies listed on India’s stock exchanges, are responsible for 68% (or US$1,100 billion) of the entire market capitalization of our stock market! With dynamic and pro-active managements at the helm of these companies’ affairs, they offer a relatively safe investment option.

Thus, to conclude, investing is all about maximizing wealth (the relatively risk-free way) by investing in safe, potentially profitable corporates with a good reputation, a proven track record, and a future that seems assured. India is a land of constant new opportunities which are emerging as a result of the progressive growth of our economy, and the opening up of new avenues of business in the corporate sector.

If we have to put value on future opportunities, it would run into crores and crores of rupees, but to seize and realise these opportunities corporates should be able to raise huge capital. They must also be capable of creating the right business model to generate profits from it. Who else than a big corporate house having large scale and size to be able to do this? And surely investors, particularly, both foreign and Indian institutional investors, will entrust their funds only to institutions with proven management skills.

So, dear friend, by default, these big companies will get the lion’s share of all future opportunities. Consequently, they will be on the fast track and remain on a high growth trajectory. So, invest in them and make the most of the growth opportunities unfolding in India, one of the world’s most promising and rapidly developing markets. My sage advice is: invest regularly; do not time the market, rather plan the time (investment period) you intend to stay in the markets, and only invest in proven, large-cap companies with a track record for seizing and realizing growth opportunities for the benefit of their shareholders.