NISM Course Breakdown Part 8: Investment Principles: Asset Allocation & Equity Investing

Описание: NISM Course Breakdown Part 8:
Investment Principles: Asset Allocation & Equity Investing
This section explains how investors strategically distribute capital and introduces the foundational process and metrics used to evaluate equity investments.
Asset Allocation and Diversification
Asset Allocation is the process of distributing an investor's investible surplus among different asset classes (like equity, debt, gold, and real estate). This is done to balance the required return with an acceptable level of risk for an investor's financial goals.
Diversification:
Asset allocation achieves diversification by ensuring the overall portfolio's return is protected from the adverse effect of a fall in one or a few assets. Since not all asset values rise or fall together, allocating across different sectors or asset categories reduces the risk of loss and stabilizes returns.
Alignment:
The choice of asset allocation depends on the investor's investment horizon and their risk appetite. For example, younger investors with a long horizon typically allocate a larger portion to riskier assets like equity.
Equity Valuation: Price and Value
Equity investing requires understanding the difference between the actual trading price of a stock and its theoretical worth.
Intrinsic Value:
This is the theoretical estimated value per share, based on the discounted value of its future benefits (expected future earnings) to the investor.
Market Price:
This is the price at which the share actually trades on the stock market, reflecting the collective opinion of all buyers and sellers.
Valuation Strategy:
When the intrinsic value is perceived to be more than the market price, the stock is considered undervalued; conversely, if the intrinsic value is less than the market price, it's considered overvalued. The primary investment goal is to buy undervalued shares and sell overvalued ones.
Core Equity Investment Process
Equity investing involves making strategic decisions about specific stocks and market timing.
Security Selection:
This is the critical step of choosing the right stock, requiring an understanding of the business, its future prospects, and factors impacting its potential value.
Market Timing:
This involves periodically reviewing and deciding when to sell lower-performing stocks and buy higher-potential ones, often based on anticipating economic cycles and growth phases.
Key Valuation Metrics
Analysts use several metrics (multiples and yields) derived from a company's financial data to assess a stock's valuation:
Price Earnings Multiple (PE):
Calculated as Market Price per Share / Earnings per Share (EPS). It indicates how much the market values one rupee of a company's current earnings.
Price to Book Value (PBV):
Compares the Market Price per Share / Book Value per Share. It relates the market price to the company's net worth per share.
Dividend Yield:
Compares the annual Dividend per Share / Market Price per Share. It is inversely related to the share price; as prices rise, the dividend yield falls.