What to buy?
09
November
Singapore market can be segmented into 3 categories and these affect buying habits of the underlying investors.
The first segment is blue chips.
The blue chips such as major 3 banks (DBS/UOB/OCBC), Kepcorp, Capitaland, Citydev, Singtel enjoy strong institutional support. They’ve proven their sustainable earning over many bear market cycles and emerge stronger during positive economy outlook.
The movement of these stocks are mostly reflected in the main index, and inline with the macro economy of the country. Bluechips are mostly the least volatile as compared to other segments
The second segment is mid/big capitalized companies
Most big caps (with capitalisation over 1 billion) such as Noble, Olam, Wilmar enjoy enjoy institutional support if they’re in the target growth sectors (such as commodity right now).
The movement is more volatile than blue chips as there are more active investors involved in it.
The third segment is the small capitalized companies.
Investing in small caps/pennies have been the major focus of retail investors. They’re the most volatile in all segments. They could be deeply undervalued as they do not enjoy premium rating as the blue chips. The small caps or pennies are subject to heavy trading and the most volatile of these 3 segments.
(Have a look at China hongxing ($0.17) which has more cash than its market capitalization. However the market participants are not attracted to it).
The pennies are the first to fall in any market correction and the last to advance during any rebound. And most of the time the rally in pennies signify the tail end of the ongoing trend.Retailers love pennies because price appreciate rapidly. It’s common to see the stocks advance 10%-20% within 1 day.
Only limited pennies enjoy institutional support hence their share price can swing wildly as no buyers step in during any correction.
The screenshot below is the example of wild swing of United Envirotech.
United Envirotech enjoys parabolic rise during the recent rally as investors anticipated strong financial result in this quarter however its share price battered badly during this recent weakness. There is nothing wrong with its fundamental as it just announced a net increase of 182% in profit last Friday.
Many retail investors are puzzled as strong profit is not followed by the rise of share price. However the explanation is simple:
- The strong institutional support for this stock is missing
- The rise of its share price is the reflection of speculators activities instead of genuine buying interest
By understanding these 3 market segments you might decide on what to buy if you look for investment alternative.
Before you emerge as good trader it’s best to focus on blue chips or big caps stocks instead of jumping into the pennies.