The stock market, also known as the share market, is where publicly traded companies issue and trade stocks, or ownership shares of their business. Investing in the stock market can be a great way to grow wealth over time, but it’s important to understand the risks and do your research before investing.
Learn Stock Market
To learn about the stock market, it’s important to first understand basic financial concepts like stocks, bonds, and mutual funds. It’s also important to understand different investment strategies and how to analyze financial statements and market trends.
Many resources are available for learning about the stock market, including books, online courses, and financial advisors. It’s also important to stay up-to-date on news and market developments, as well as to maintain a diversified investment portfolio to manage risk.
Investing in the stock market can be a rewarding and exciting journey, but it’s important to approach it with caution and a solid understanding of the fundamentals.
Table of Contents
Step 1. Understand the basics of financials
Therе rе thouѕandѕ оf ѕtосkѕ liѕtеd оn BSE and NSE аnd it’s almоѕt impоѕѕiblе tо invеѕtigаtе еасh аnd еvеry оnе оf them by going thrоugh thеir еntirе finаnсiаl infоrmаtiоn. Thеrеfоrе, fоr yоur initiаl cоnѕidеrаtiоn, yоu саn usе thе bеlоw еаѕy tо implеmеnt ѕсrееning сritеriа tо filtеr оut thоѕе ѕtосkѕ whоѕе fundаmеntаlѕ lооk ѕtrоng.
- Market Cap > Rs 500 cr
- Sales and Profit growth >10%
- Earnings Per Share(EPS) growth rate is increasing for the past 5 years
- Debt to Equity Ratio <1
- Return on Equity(RoE) >20%
- Price to Book value(P/B) <= 1.5 or low compared to peer companies within the same industry
- Price to Earnings(P/E) < 25 or low compared to peer companies within the same industry
- Current Ratio > 1
You can then check the other financial ratios as part of the screening criteria by clicking on the company factsheet.
Step 2. Find businesses that you understand
You can do this by visiting the website of the company, tracking updates on media platforms, searching for the company on Google, and getting peer feedback from fellow investors.
Learning more about the company will help you to understand the company’s business and will provide answers to three key questions:
- Is the company’s business simple?
- Do I understand the product/service?
- Do I understand how the business works and makes money?
It is important that you invest in companies that you understand, at least in the initial stage when you are learning to invest in stocks. That way you will be ensuring that you don’t lose money.
For example, from the stocks that we filtered in Step 1, I would have looked at technology stocks like Tech Mahindra, Vakrangee, and Mindtree Ltd to begin with. That is because I have significant work experience in the IT sector and I am also passionate about technology which makes it easy for me to understand these businesses, the reasons for their growth, and predict how the future could turn out to be.
Similarly, my cousin comes from a Pharma background and therefore it would be easy for him to understand the stocks in that sector.
There could be many businesses that may not require any kind of background to understand at all – think consumer products like footwear, shaving cream, automobiles, etc.
For example, your filtered list of stocks has a two-wheeler manufacturing company. You need not have a background in the two-wheeler industry to know that the two-wheeler sector has always shown growth in India due to increasing demand and better road connectivity.
Similarly, when the real estate sector was growing in India, then the companies which manufacture tiles (Kajaria), sanitary (Cera), and similar supporting companies could be accessed.
The business model of the company should be simple and the company should excite you.
Lastly, if you do not find any stocks (companies) that you can right away understand, spend time
studying the company and its sector. Learning about the business model, market trends, and competition can help you gain a better understanding of the company and make an informed investment decision.
You can start by reading the company’s annual reports, investor presentations, and news articles related to the company and its sector. You can also attend conferences and webinars related to the industry to gain more knowledge.
Furthermore, you can seek advice from financial experts or experienced investors who have knowledge about the company or sector you are interested in.
Investing in stocks requires patience, research, and a disciplined approach. With the right knowledge and approach, you can make smart investments and earn good returns in the long run.
Step 3: Identifying companies with a competitive advantage, also known as a “moat,” is crucial.
A company’s moat is what sets it apart from its competitors in the same industry. A wider moat means a more sustainable company that is difficult for competitors to displace and capture its market share. Examples of moats can include brand power, intellectual property rights and patents, network effects, government regulations controlling barriers to entry, and more. It’s important to identify companies with strong moats in the initial days to invest in.
Step 4: Finding companies with low levels of debt is important.
High debt levels pose a significant risk to a company, making it dependent on borrowed capital to fund its growth. A couple of screening criteria used to filter stocks include the Debt to Equity Ratio and Current Ratio. Checking the company’s balance sheet to see if it is reducing its debt and using the money for other purposes is a positive sign for the company’s financial health. Real estate companies, infrastructure companies, and banks tend to have large debts.
Step 5: Calculating the financial ratios
RoE (Return on Equity) and RoCE (Return of Capital Employed) is necessary. These ratios help investors understand how profitable a company is in terms of investments and how efficiently it is utilizing its resources. A company with a high RoE and RoCE signals great potential for future growth in the value of the company. Companies that do well on these two ratios, by being above 20% and increasing for the past 5 years, command premium valuations.
Step 6: A company’s management is an essential factor to consider.
Honest, transparent, and competent management is necessary to prevent fraud, shady deals, accounting frauds, misleading shareholders, and causing monetary loss to investors.
When it comes to portfolio allocation, it’s important to avoid putting all your eggs in one basket. To limit risk, it’s recommended to hold no more than 20% of your entire portfolio in one stock. For instance, if you plan to invest Rs 10,000 in 5 stocks to create your portfolio, you should not invest more than Rs 2,000 in any single stock. Of course, you can opt to allocate a smaller percentage, such as 5 or 10%, if you perceive the risk to be greater.
As your portfolio appreciates over time, it’s crucial to adjust your allocation accordingly based on its current value. For example, if you initially invested 20% or Rs 2,000 in one stock and it grew by 25%, resulting in a return of Rs 500, your present portfolio value would be Rs 10,500. In the future, when allocating 20%, the amount should be based on the current portfolio value of Rs 10,500, resulting in an allocation of Rs 2,100.
In conclusion, you don’t need an advanced degree in finance to invest in stocks. Many successful investors come from humble academic backgrounds. If you’re just starting out, this article can help you get started. As Peter Lynch says in his book, “You need about a 3rd-grade math education to be a good investor.” Ultimately, investing success is determined by identifying a good company, purchasing it at the right price, and holding it with patience.