The equity investment process – Chapter 1

After a lot of procrastination I have finally decided to start the series on the equity investment process. The aim is to give some big picture guidance on investment to the layman. Note that the term ‘investment’ in implies that these would be longer term.

For me there are 5 key steps to investing. We will go through these steps in much detail in later posts. For now these 5 steps are.

Step 1: Screening for ideas

There are 259 companies in Dhaka Stock Exchange. Trying to follow these 259 names would be utter stupidity. That is why we have to screen for ideas that are investable and bring down this number to a more manageable list. Portfolio managers on the ‘buy side’ use a number of methods for screening and we will go through these methods in the next post.

Step 2: Filtering the names

Ideally, there shouldn’t be any step called filtration. However, in frontier markets like Bangladesh this is an important step to prevent oneself from getting burned. The criteria I use to filter in this stage includes corporate governance, reporting quality, management and sponsor reputation etc.

Step 3: Analyzing companies

The third step takes the largest amount of time and is basically the most critical. This is the stage where we really study the short listed companies in details. We will go over the industry dynamics, the business model, the financial statements and pretty much anything that will give us the ability to create insights about the future of the business. Valuation will also happen at this stage.

Step 4: Investing

After we have really analyzed the company in detail and made some sort of valuation (it could be very rough or even very in-depth work) we finally take the investing decision. Depending on the upside potential and the conviction (and factors like stock liquidity) we need to allocate funds to the stock.

Step 5: Selling the stock

The last stage in the process is taking the right exit. This again is a very tricky issue and people use various methods for deciding their exit options. I will try to be as comprehensive as possible and explain the different options available.

Asif Khan, CFA

Asif Khan is presently a Research Analyst (Financial Sector) for Exotix which is a frontier market focused investment bank. He has more than 6 years of work experience as equity analyst in both buy and sell side roles across Asian frontier markets. Asif is a CFA Charterholder and has a dual major in Finance & Economics from North South University.

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