Find Your Way Up the Equity Market by Taking these Top Courses

The legendary Warren Buffet defines investing as “the process of laying out money now with an expectation of receiving more money in the future.” This money is usually the surplus income you may have.

Most youngsters have the question, “Is the equity market right for me?”. Yes, equity markets are meant for everyone. As you work hard and make money, you want your money to work smarter for you. Equity is the asset class that comfortably beats inflation in the long run. 

A survey done across asset classes which include equity, debt, treasury bills and gold, with inflation for 100 years, showed that equity was the asset class that beat inflation comfortably across all periods. As a rule of thumb, 100 minus your age should go into equity. For example, your age is 20 years, so 100 – 20, i.e., 80% of your investment, should go into equity. 

So how do equity markets move up or down? Or What are the key drivers of equity markets? The article elaborates on this, with career opportunities for youngsters.

Stock prices are the function of demand and supply i.e., prices are determined by buyers and sellers. But the question is, what drives the buyers to buy or sellers to sell? Unfortunately, there is no exact equation that tells us the factors affecting the stock price. 

Prices of stock move up or down due to company-related factors, i.e., those factors that are inherent to the organization like production, supply chain, strike, controversy, problems with the company’s Board of Directors etc. The risk associated with company-related factors is called unsystematic risk. Stock prices also move because of environmental factors, known as systematic risk, which is associated with the market. 

Let us examine some of the key drivers of the equity market:

Fundamental Factors

When you buy shares/equity of the company, you buy part ownership into that company. For instance, if you buy 10 shares of Reliance industries, you become part owner of Reliance and all the factors that are inherent to Reliance industries will move the stock price of Reliance. These are focused on two major dynamics:

• Earnings Base: Earnings base measures the company’s earnings using a financial ratio called Earnings Per Share (EPS). Here, the company's net earnings available to equity holders are divided by average outstanding shares over a period. For example, Amazon.com Inc's earnings per share (as reported by Nasdaq.com) are $6.48, $14.11, and $27.79 for the years ended December 31st, 2019, 2020 and 2021, respectively.
  • However, EPS is arbitrary and does not tell you whether the number is good or bad. We use one more earnings base called Price Earnings or (P/E ratio). Price earnings ratio is calculated using share price divided by earnings per share. Higher earnings per share means higher profitability and vice versa.

• Valuation Multiple: Valuation multiple measures company expectations about the future. Here, we calculate the present value (PV) of all the future cash earnings. Two factors that are critical here are:
  • The expected growth in the earnings
  • And discount rate, which is the rate used to discount future streams of cash flow into its present value. What determines the discount rate? It is a perceived risk.
  • A riskier stock will have a higher discount rate and vice versa. Inflation is also a component of the discount rate. Higher inflation earns a higher discount rate.

Technical Factors 

Technical factors are a mix of external conditions that impact stock prices. Some of these directly or indirectly impact the company’s fundamentals. Technical factors that lead to the movement of stock prices are:

• Inflation: In layman’s terms, inflation is a general rise in the prices of goods and services. Low inflation has a strong inverse correlation with valuations, i.e., low inflation drives high multiples. Both very high and very low inflation (negative inflation/deflation) can create problems for companies. The chart below depicts countries with high and low inflation in April 2020.
• Economic Strength of Markets and Peers: One of the critical factors that move the stock price is the economic strength of the market and the performance of other companies in the same sector. For example, Tata Consultancy Services (TCS) prices would also depend on other companies in the IT sector like Wipro, Infosys, HCL Technologies, Tech Mahindra etc.
• Substitutes: Companies compete for investment with other asset classes. These could be corporate bonds, government bonds, commodities, real estate etc. Expectations from equity go up with the interest rate on corporate bonds.
• Incidental transactions: the stock buying/selling is often motivated by factors other than intrinsic value. Examples could be insider trading, where you buy or sell a particular stock because you have access to information before others that would move the stock price. You act on the same and buy/sell large quantities of shares to make a quick gain. Insider trading is banned in India as per SEBI regulation.
• Demographics: Demographics play an important factor in stock price movement. Younger people tend to take higher risk and have a higher proportion in equity markets than older people. With age, the percentage of investment in debt or money markets increases, whereas that of equity decreases. Risk appetite of people with growing age reduces and hence their equity investment.
• Trends: Those who track technical studies often identify the trend in the stock movement. They would buy the stock if it is in an uptrend and vice versa. Technical study deals with charts and patterns. In technical terms, the decision of when to buy is more important than what to buy.
  • Technical study makes use of candlestick patterns, charts, moving averages etc. Those desirous of understanding technical analysis will have to study these charts, patterns and trends in detail on live markets.
• Liquidity: Liquidity refers to the number of people who buy and sell stock on a regular basis. The higher the number of investors/traders interested in the stock, the higher the liquidity. Blue chip stocks like Reliance Industries, TCS, Tata Motors, HUL etc., are highly liquid stocks.

News 

News related to a particular stock or market impacts the stock price. Although it is difficult to anticipate and quantify the impact, political news, war-like situations, pandemic breakouts, news on vaccines etc., have a bearing on the value. 

Market Sentiment 

Market sentiment is the understanding of behavioral finance. Behavioral finance studies the effects of psychology on financial markets and investors. It refers to the market sentiments individually and collectively Greed and fear are two major emotions that impact the buying/selling decision of individuals. Market sentiments could be biased, subjective and obstinate. It is also driven by news on the market or a particular stock.

Equity investment is a billion-dollar market. There are multiple factors that one considers in investment and trading. There are traders whose view is short term and there are investors who consider the fundamentals of the company and invest long term. Paperless lending, mobile wallets, secure payment gateways, faster trading, and the emergence of blockchain and cryptocurrencies have led to a 360 degree change in the Banking, Financial Services, and Insurance (BFSI) industry.

Technology has helped the BFSI industry in many ways. We can operate banking and equity trading on our mobile phones with ease. We could not venture out of our homes during covid, but that did not hamper our banking or financial services transactions in any way. 

Investors and traders often do complex calculations to understand the market and make investment decisions. Today, we use algorithmic trading to spot the price movements. There are different categories of investors present in the market as well - Retail investors, Foreign Institutional investors, popularly called FIIs, and Domestic Institutional investors or DIIs.

As per Bain & Company, investments in India grew 3.8x over 2020, faster than China’s 1.3x. Share of Venture Capital (VC) funding in India accounted for greater than 50% of overall Private equity and VC investment in the country in 2021.

As per the report of IVCA – EY In 2021, India recorded investments of $77 Billion across 77 deals, including 164 large deals worth $58 Billion. Investments in Private equity and venture capital firms in Indian companies touched an all-time high of $77 Billion in 2021, almost 62% higher than in 2020.

Stock market is a domain where multiple job opportunities are always available. With a decent amount of experience and expertise, a professional can have an excellent career with very good earnings. Before taking it up as a full-time job, it is very important that you understand the risk and rewards associated with your career in the stock market. 

You need to undergo formal training, either online or offline, to ensure that you have the right guidance and understanding. Understand the skills required to make the right career move and sustain it. Some of the career opportunities that are available in the stock market are:

• Equity Dealer: Here, you buy and sell financial investments on behalf of the client. Your role also extends to advising the clients on these investments.
• Research Analyst: You would be expected to investigate sectors and / asset classes and prepare a report for internal or external use.
• Relationship Manager: You would be part of the revenue generation team, where your role would be critical in connecting with clients to understand their requirements and advise them on different products and services.
• Professional Investor or Trader: Here, you make your own trading strategies and trade / invest in different financial investments to make gains on investment. This is mostly a self-employment role.
• Stockbroker: A stockbroker is a registered entity in the market that researches, advises and trades on behalf of the client.
• Investment Advisor: As an investment advisor, you will be engaged in providing investment advice on different asset classes like equity, debt, ETFs, gold etc to the client for serving their interest.
• Investment Banking Professional: As an investment banking professional, you need to have analytical, industry and financial expertise, which is used to provide services to institutional clients to help them with activities like mergers & acquisitions, fundraising, advisory etc.