How To Enter And Exit In Stock Market : As you know that the market nowadays is very volatile And there is a lot of panic So at this time, the question people ask the most, Is this the right time to make an entry in the market? And if it is the right time to make an entry When will the right time be to exit and when should we exit from the market?
We are going to discuss about, what should be the right time to enter and exit from the Stock Market? So the first question I would like to ask, you know what the theme of this post is It is what the right point of entry and exit is So would you like to tell us a little about this. So I hope everyone is staying at home and staying safe.
So I would like to say that everyone is doing well by staying at home, not many people are going out. This is a good thing! India, I think The number of cases in India are relatively lower as compared to the world. The Coronavirus have not increased that much. So there definitely is negative news in the world, the market have fallen down a lot And because the markets have fallen, there definitely has been a lot of panic.
Firstly, there is panic among the people But at the same time, in a market like this, there are a lot of opportunities as well Maybe even you would have realized on your website. Many people are knowing paying attention towards education. We realized on our channel that there suddenly was a peak.
People have now become educated and because people have more time now. They are willing to learn new things And according to me, there is a lot to learn in the stock market. Now we will come to the question, when is entry and exit right in the market.
So let us first talk about entry Entry is right, firstly when you have money. And the money should be in surplus Not the money that you have to use in an emergency, that in day to day You need to run the household Now to run the household Especially in situation like this, when there is a recession.
When there is a slowdown or some panic created in the market. It is important for you to create some emergency fund. Create an emergency fund for 6 months to a year. After that, the surplus cash you have, You can invest that in the Stock Market.
And the opportunity to invest has definitely come about now And it is not that, it has come now and the markets will start rising. So here we need to understand some data that. What is the right time? I won’t a lot in the details of the market. Let us discuss some data to set the context For example, the unemployment rate has increased a lot in today’s time.
I will try to explain the relativity of this a little, I want to quote this data for the audience. If you look at the US, the unemployment rate there, for the unemployment benefits. The applications, etc that people have put there That number is around 26 million So they have a population of around 350 million.
So around 8% of the people have put in their applications But if we extrapolate this a little. There is no official data but according to the unofficial data, it is being estimated that. The unemployment rate in the US is around 15-20% Now let us try to understand this in a relative sense.
If we talk about 2008 So that was the peak of unemployment rate of about 7-8%. If we go back further into history The maximum unemployment rate during the great depression was about 25% The unemployment rate in 1933-34 was around 25% Now the data for unemployment This is extremely important We will talk about the data on the demand side.
But the data for unemployment It is a simple, if we don’t have money to spend, how will the economy work. Now let us study the other side, where does demand get generated Many times, during a market time like this. So the government intervenes, even the government increases its spending Now the government is trying a lot to increase the spending But at the same time The unemployment data will be an obstacle for you here Because if unemployment is more, the tax collection will be more.
There are many salary cuts We see in the news everyday that a company cut its tax by some amount in this year. Many companies are on furlough Until the situation doesn’t improve, people should sit at home And they won’t get salary, many of the situation have come to this. So the spending of the government increasing and the intervention by the government. It can be even us lowering our interest rates.
So we are talking about both things, the government spending and the intervention of the government or RBIs intervention. All of these effort, the unemployment data This surpassing everything Because of unemployment, the market. The economy that was supposed to happen, won’t happen. It has come to a standstill in the lock-down. This is quite a big problem So this is a problem in the demand side That’s why I am saying there is definitely opportunity to buy in today’s time.
If we talk about the stock There, the P/E ratio, which we call Price to earning ratio If we look at it for the entire Sensex or Nifty This was at 27-28 Which means that it was working in the range of 25-28 I think even you would have analysed, last year. If you look at the entire range, it was in the range of 25-28. Now if you look at it relatively, in today’s time, 18-19-20. Is the P/E right now, which is very stable So if we only talk about valuation The valuations have become quite attractive So another data we can see in the supply side, if we talk about GDP.
GDP definitely, if we look at today, the growth data IMF and many agencies are saying India’s growth rate to be The growth rate will be around 1.7%-1.8% In this financial year. So according to that, this becomes very less So here, if we talk about opportunity If there is an opportunity today, there can be more opportunities in the future.
Why will that happen? Because when the data comes now When a data comes after one quarter If we look at the data for April-June Let say that the GDP rate in some country suddenly falls by 20% . There definitely will be a panic created And because of this panic.
The markets will go down, already there are problems in some companies But because of this stock market sell off, many people Stop their investing or spending And because of that, so many companies That depend on consumer spending and consumer investing Many problems start getting created and a downward spiral is formed So because of this, the negativity and year That can definitely increase now.
So in the coming time, you definitely will get more opportunities There are some negative and positive aspects to that the negative aspect of the market going down is that people can lose their job So like we spoke before, you need to create an emergency fund It shouldn’t be that we see an opportunity in the market and invest the entire amount.
So it is important that we should study this data that I spoke about What is going on in the entire market. I will quote some more data to you Like we spoke about P/E ratio. It is in the range of 18,19-20 It is a fair evaluation If you look at historical data, The P/E ratio of sense and nifty has been in the 17-18 range And because our growth has been around 17-18% . Every year, if we talk about compounded annual growth rate The P/E ratio between 17-18 That is a good P/E and below that There is a lot of undervaluation And if the P/E goes below that, then the buying opportunities, become very good.
I would like to quote from 2008 around October and February 2009, There was a P/E of 12-13 The price earning ratio of sensex and nifty So it is not that it will go to 18 and stop It is possible that at the P/E of 18, the markets can stop Even if our sansex goes down that much. I would like to quote another data here The market cap to GDP ratio which we also call Buffett ratio Warren Buffett quotes this a lot Which gives you a small idea of how the valuation of the stock market is The market cap to GDP ratio in India.
That stays at an average of around 75 Now the data has come to around 60 So if we look at the stock market, it is definitely undervalued, there is definitely buying opportunity, But its not that its only now Markets can go down further It is important for people to first make their Emergency Fund. You first have to set up your Emergency Fund.
How can I choose a company For Investing In Stock Market
>>There can be two approaches <<
- Top down approach
- Bottom up approach
After that the surplus money that is left, you should think of investing only that But the biggest question that comes here Which every retail investor asks How can I choose a company? There are many option in Nifty and Sensex But how can I choose a good stock, there can be two approaches Top down, I go to the sector and choose a company Or bottom up, starting from a company So what approach will be considered the best in this scenario both approaches are right, it depends on What the person is more comfortable with For the top down approach you need a little more time.
You have to do an economic analysis After that you will do a sector-wise analysis That you’re liking a particular sector You will do a sector analysis and then search for one stock And then you will analyse that There is no problem with that, you definitely should do that. If you have understood the overall economic scenario once You can do it after that But how can beginners start this?
The easiest way is for a beginner to see In which market does he like buying products in They go to some bank and like the service of that bank. They start researching more about the bank They like a consumer product and think that that product is very different.
They like some electrical product What is the company that makes those You should research about that, so this is the easiest way for a beginner Many people probably cannot conduct economic research. That’s why i am telling you, but if you can do it.
There is definitely no problem in the approach Consider that you followed any approach You followed the top down approach or you followed bottom up approach.
Consider that there are 5-10 stocks in your radar and you say you will track them After that you should go into more of the financial of that See the normal financial analysis of a stock Calculate its P/E ratio. Which we call price earning ratio Look at the price earning ratio historically and compare it to its Peer means, its competitors, compare it to them. If its P/E ratio is lower, then it can be a buying signal. It shouldn’t be the only signal It is not completed with one data point So I would like to quote my personal experience.
When I started investing, like many investors Even I made mistake like other people do We study 2-3 data points We read in some book about a data point and think it is more important. But it is very important to study multiple data point For example, we should calculate the P/E ratio We can see the P/B ratio, for companies that are asset heavy The price to book value comes into the picture, you can study all this Yes, there definitely is PEG ratio apart from P/E ratio.
How the companies growth is From P/E ratio
How the companies growth is From P/E ratio we get to know how cheap a stock is You compared that to its peers You compared that to its competitors. But it shouldn’t be that a company is growing by 50% every year so You compare it to the company that is growing by 15% You should see the growth rate, if the company is growing very fast That will definitely command So here is the peg ratio So if the P/E ratio is equal to the growth rate of any company, then definitely.
That company is fairly valued in one way So this is also a data point, P/E ratio is another data point Peg ratio can be a data point P/B ratio can be a data point. Then some data points can be related to risk. Some companies that are very debt heavy, There is an inherent risk in them If there is even a little liquidity concern in the company. Their debt repayments can also be faltered.
When the debt repayment is faltered, the downward spiral of the company starts whenever you go down a path, you should keep an eye out for land mines. What can these land mines be, red flags you have to look at Whether a business is debt heavy. In some companies, debt is an inherent part So now if banks have to give some loans.
They also collect deposits, it is a liability for them In infrastructure companies, there definitely are liabilities, if they want to start a project, they have to take loans. But is that company maintaining a healthy ratio, If it is within the healthy ratio Then that company can be good It is important to study it continuously.
The second land mine is the shares that the promoters are pledging If they are pledging shares, then there is some problem in the company That the promoters feel the need to pledge their shares. It is important for us to identify land mines such as I said before you have to study the financial and read the balance sheet about the current situation.
I will tell you that the balance sheet is most important Which companies balance sheet is good First you should see which company will survive two years Which company’s cash position is good? If you study all these things, then you will be able to start investing.
So i think your concept is clear about the How To Enter And Exit In Stock Market, we told us in detail about how we can choose a good company And by avoiding the red flags, how we can be saved from choosing the wrong stock.
And now we spoke about debt, that it can be quite problematic for some companies So people ask here, is debt always dangerous? Or is it right to take debt to a certain extent And what is the level for companies, that until they are taking debt We won’t consider that a red flag. And after a certain point we will consider it a red flag as you know the news about Franklin and before that there was news about DHFL.
People are very afraid about debt funds and debt the debt ratio is different for every sector, it is not that Consider if we talk about the infrastructure sector If the debt to assets ratio there is, means your debt to equity ratio is 2:1.
But for consumer stock a 1:1 ratio can be considered healthy So it depends on the sector you are analyzing So compare it to the peers, what one industry’s average has been Over the past 15-20 years. If it is below a certain company If a company is debt free In real estate or in the infrastructure sector. If you get a debt free company, nothing is better than that And despite that it is maintaining its cash flow Nothing is better than that But as I said, only one data point Can’t tell you the stock you should invest in.
You should study multiple data points debt ratio is one important point among them because Red flags are generated very fast here Like we spoke about DHFL and the Yes bank fiasco that took place. The problem there was that the liabilities Of the company increased a lot And their cash position was not that strong.
When the liabilities for any company increases a lot we spoke a lot about entry, about the things to keep in mind when we are planning to enter I want to ask you a little about exiting, Because many people enter in very good stocks, But they are unable to exit at the right time.
Because many people probably bought Yes bank even at Rs 100, Yes bank went to Rs 400, Many people weren’t able to book it Because it is very difficult to exit, there is a psychological bias of users as well about the stock Our psychological behaviors also impact this a lot How can we exit a stock properly?
If you can tell us a little about that So this is quite a good question We already spoke about entry The decision to enter can be taken relatively easier But exiting is slightly difficult. Because while entering, how low can a stock go Maximum it will go to 0.
But there is not limit for it to go up That is why calculating or intuiting the exit can be slightly more difficult For any investor So how can we figure out whether a stock has reached its peak we cannot understand whether a stock has peaked.
Because there no limit to the growth a company can have But we can figure out Whether a stock has been overvalued in the current position So obviously we can calculate all those ratios We can calculate P/E ratio, but Consider the P/E ratio is at around 50 So according to me, that is a not quite right. That is not a fair valuation, which means it has been overvalued So on the one hand, we can study the data.
Secondly, you start getting hints of overvaluation If a certain company is getting too much media coverage So that, I won’t call it a red flag but You have to become cautious there If a company is growing well All the fundamentals are right, then there is no problem. That is why it is important for you track, wherever you’re investing.
You should track that Yes, if the fundamentals are strong and the growth is good, then there is no problem in commanding a high P/E Now secondly we will talk about if the stock market itself is overvalued. How can we understand this We can go back to the fundamentals we spoke about how we can check the P/E ratio and ped ratio of any company Secondly we can also look at some qualitative data, about a company.
Let’s say there is too much media coverage Too much is being spoken about it That can be a caution for you It is not necessary that it is a red flag, but it can be a caution After that you should see whether its fundamentals are strong enough for it to be getting that much media coverage Now we spoke about a particular stock. Now the stock markets itself are overvalued We can find that out also, there are some indicators for that as well.
We will go back to the basics, talk about those indicators again We spoke about Buffett ratio, comparing the market cap to gdp ratio if we look at it for the past 10-15 years. The P/E ratio has been 75 if your market cap to GDP ratio goes above 80 then definitely. The markets are overvalued I would like to quote an example that In December of 2007, this ratio went to around 149 So obviously then the market were highly overvalued.
People are ready to pay double the average price On an average, for the whole stock market all these can be red flags for you. We spoke about market cap to GDP If we look at the past 3-4 years, the average was around 80 with the average of 80, the market was still overvalued this can be a caution sign for you as well. Yes, if the market maintain it If it maintains it, if it goes form 70 to 80. 80 isn’t a very high number So we can’t say it was highly overvalued if we just talk about Buffett indicator But along with this you can study the second data point as well which we Spoke about in the P/E ratio of Sensex and nifty we got a sign of caution last year.
The P/E ratio was being maintained between 25-28 which It is more than the historical average So if the historical average has been between 18-25 Now maybe a P/E of 27-28 only will work Now people will only buy expensive stocks. The market always needs a trigger, this time it was Coronavirus Previously it was subprime crisis At one point there was demonetization. The market needs a trigger to correct the value history repeats itself, we get all the answers in history I don’t think that there is a new normal Obviously there is an absolute normal, the P/E of around 17-18.
That is maintained in the world, the world infect is impacted lesser Because we have a developing economy it can be slightly higher for us Because we are going on a higher growth rate you can look at the P/E ratio and market cap to GDP ratio.
The third data point you should look at is the unemployment rate, which tells us a lot you look at the historical unemployment rate our rate has gone much higher Even if we talk about India, until now we spoke about the US In India, the unemployment rate has become between 18-20. This is much higher than our average Our average in the past has been around 7-8%. So many people become jobless This can definitely be a red flag if the stock market is overvalued, this was about it being undervalued.
The meaning of unemployment is that, if in the market The salaries are increasing a lot Maybe sustaining that is very difficult So this can be a data point for you, that maybe in today’s time Many people are talking, salaries are increasing a lot. Consider a plumber comes to your house A carpenter comes I will not say that a plumber or carpenter can’t be interested in the stock market or invest in it. But the people who generally do not talk about the stock market Even they start talking Even that is a data point for you to study.
That means the stock market is overvalued They are creating enough buzz So that everyone starts talking about it. This was a very insightful Article.
I would like to discuses a last question From what you said, the market seems to be undervalued it can be a good time to invest the biggest question is that.
If I have Rs 100 Should I invest all that today? Or should I invest that in chunks in the current scenario here. there are two philosophies and neither of them are wrong One philosophy says that when you feel that the markets have become undervalued You should start making your investments in a staggered way The meaning of staggered is that if you have 100 In surplus, you have put aside your emergency fund. You can invest Rs 100, so out of that Rs 100 start investing. Let’s say you put 10 now and start investing monthly You put it in installments of ten whenever you think there is a dip in the market You can stagger your investment, this is one way.
The second way is that if some people can follow the market more keenly The first way is for people who don’t have regular time This works well for them The people who can follow the market keenly. This can be a way for them Wait for the dust to settle Until there is negative news in the market. Wait until then The situation is bad because of the Coronavirus but the news has stopped coming It is not like that More negative news can come The cases of Coronavirus aren’t reducing, they are increasing continually In the quarter of April to June the GDP can fall down a lot In many countries, even India’s can fall a lot.
Infact the quarterly results of companies can be negative So until this negative news is coming, you can wait until then Until the dust settles It can be elongated, the negative news can go on for longer . It can go on for 6,8 or even 10 months until this negative news is coming, you can wait When the market goes up a little, consider 10, 11 or 12% . It can be a trigger that maybe the negative news has stopped We can consider that the bottom has been reached You definitely won’t be able to identify it completely.
What the absolute bottom is That is very difficult, we have to read astrology for tat When the bottom is reached When you think that the bottom has almost been reached. At-least the negative news has stopped coming Then you can even make a lump-sum investment. Both these philosophies are right For some people one can be more right that the other if you want to implement the staggered approach, you can do that as well.
You started investing with a certain amount and as the market is dipping You can put in little more money But, if you think that you can follow the market a little more keenly Then you can waitUntil the dust settles. Then you can wait, and when the market goes slightly higher, 10,15% , The initial loss of 10-15% Don’t consider that as loss, it is an opportunity loss. That is already covered, because as the market was going down.
You obviously didn’t invest, so you didn’t have a loss there So to exactly predict the bottom is very difficult So out of these two, whichever approach fits you, you can implement that.
So the biggest question our viewers asked us How can we predict the entry and exit, predicting that is still impossible but you told us many factors You told us about many indicators Using which they can get an idea whether its a good point of entry And maybe it is the time to exit.
Apart from this, if you want to invest then you can in a staggered way But do not try to predict the time for the market Because it is impossible to time the market Instead, spend time in the market And if you invest for the longer horizon you can make good returns.
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