Wednesday, September 30, 2009

Should you enter the markets now?

Signs of economic recovery are strong. The rally witnessed recently can be attributed to encouraging economic data that worked in the market's
favour. But many investors have fresh memories of the last bubble burst. If the markets come tumbling again, investors will have to bear the brunt of heavy losses. What are the options before the small investor? Is it time to sell or hold on in anticipation of greater gains?

Some experts caution investors that the markets are over-bought . An overheated market has high chances of correction. So investors who do not want to take risks can sell their stocks and book profits. The more risk-tolerant investors can wait for their picks to touch the best price while avoiding stocks had a steep upward jump.

Investors should sell the stocks that are soaring without any specific reasons. Such stocks add to the volatility of the markets. Since the fundamentals of these stocks do not trace the increase in the stock price, the probability of an imminent crash is real.

Foreign institutional investor (FII) behaviour pattern has a tremendous impact on the markets. Increased FII interest in the equity markets will see sustained buying by them. Consequently, the index will move up. FII selling can cascade into a big fall or a bear market condition. Hence, global factors that influence FII sentiments must be continuously tracked by investors.

Stocks that are lagging behind and are unable to keep pace with a market rally are not usually worth holding on to. To deal with extremely volatile conditions , it is usually advised to rebalance your portfolio once in a quarter.
Shift in a company's fundamentals in the first indicator of an alarm bell. Are you holding stocks of companies whose earnings have stopped growing or of those that haven't come up with innovations? Sell the stocks of companies whose performance is dipping.

Do not sell all your stocks just because their prices have dropped. Evaluate if the entire sector is hit or it is only the individual company that is faring poorly. If the entire sector is hit and there are fair chances of a quick recovery, holding on to it may not be a bad idea.

If the company management's ethics are dubious or if it has got itself into legal battles, it is best advised to sell
the stocks. A new competition or government policy can reduce the profit of a company. Adding to the woes may be its growing debt. Research the fundamentals to find out the exact reason why the stocks can fall.

Buy low and sell high is an old adage that seldom fails. So, to sell when stocks are over-valued and buy them again during a market correction is a good strategy. And for this, the investor must spend a lot of time assimilating the underlying forces that impact and drive the markets.

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