InvestorQ : Can equity research help me reduce the risk of investing in equities?
vaishnavi mhatre made post

Can equity research help me reduce the risk of investing in equities?

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vidhya Laxmi answered.
2 years ago

Since equities are the riskiest asset class, how do you mitigate the risk of equities? One way is to diversify your holdings across categories so that there is an in-built hedge in your portfolio. The second very important way is to use research to mitigate your risk in equities. There are 3 basic approaches to research as under:

Fundamental Research:This approach looks at the fundamental aspects of a company. It includes understanding the macro environment, understanding the industry environment and then understanding the company level risks and opportunities. Fundamental research arrives at a valuation for each company based on future cash flows and this valuation can be used to judge whether the stock is overpriced or underpriced at the prevailing market.

Technical Research:This approach purely looks at market price levels, volumes and trends. Technicals are based on the belief that all news and information is already in the price and hence it is only essential to understand pricing patterns. Technicals use a variety of technical indicators like MACD, ROC, Relative Strength, Stochastic Variables, and Dow Theory etc.

Eclectic Research:This is the most common approach to research adopted by most analysts and fund managers across the world. Fundamental research is used to identify stocks that are overpriced or underpriced. Then technical charts are used to identify the ideal level for entry and exit. This combination gives that added advantage to institutional investors in generating alpha in the markets.