It is very important to understand how to make an investment in share markets in India. Investing in share markets is equivalent to making relationships.
As understanding makes a big role in a relationship, similarly the deep understanding of the stocks and its changing pattern helps you in making decisions for the share market. With years of experience, you can master the share market and make huge money online.
I started investing in the share market a few years back and lost money in the stocks initially. But later my analysis of the share market and my experience helped me in making profits.
I will share some tips here in this article so that you can earn maximum profits from the share market. I will share the step by step approach in selecting stocks and how to make investments in the share market.
Requirements Before Starting The Investment
There are some pre-requisites that you need before making an investment in the share market in India. Below are some of the required things:
- Savings account
- Trading and Demat Account
- PAN Card
- Aadhaar Card
There are many platforms that allow you to invest in the share market such a Upstox, Zerodha and 5 Paisa. After opening the Trading and Demat account, you can buy stock through these platforms as they offer no commission out of the profits you earn.
Types of Investing
There are basically two methods which are used by the majority of the investors around the world to make huge profits in the share market.
- Value Investing
It should be noted that trading and value investing are not the same. Trading has main focus on making profits in a shorter time period irrespective of the falling or rising of the market. Trading involves the holding of stocks for a few minutes or for a day. It involves buying the shares at a lower price and selling at a higher price.
People who trade use tools such as technical analysis and uses complex indicators that help in predicting the future price of stocks. Lack of clear strategy may prove trading really dangerous as it may lead to a loss. So follow the below mentioned step by step approach in making correct decisions.
There are thousands of companies that are listed on BSE and NSE and it is really difficult to find out the right companies for you to invest. There should be a correct approach that needs to be followed to filter out the companies.
I will share the step by step approach that needs to be followed before investing in stocks and get the profits. Selecting the correct company for stock investment is not an easy process as it involves a lot of analysis by going through the annual reports, financial statements and other financial information.
But I have some simple steps that you can follow to find out the correct companies for stock investment. Below is the stepwise approach that you should follow and kick-start your journey of stock investment.
#1. Selecting The Correct Stocks
The most difficult step is to go through the complete information of the thousands of stocks listed on BSE and NSE and then made the selection. Below are the screening criteria that can be used to select the stock:
- Market Cap should be greater than Rs 500 Crore
- Sales and Profit growth should be at-least 10%
- Earnings Per Share growth rate is increasing over the past half-decade
- Debt to Equity Ratio less than 1
- Return on Equity is greater than 20%
- Price to Book value less than or equal to 1.5
- Price to Earning less than 25
The above information can be calculated using various Online Screener Tools available in the market. These include Equity Master, Money Control, etc.
#2. Make Selection of The Companies Which Are Easy To Understand
Once you have filtered out the stocks based on the screening mentioned in Step1, the next step is to explore and learn more about these filtered stocks. The information can be gathered by visiting the websites of the company that is filtered n step 1 or by reading the reviews from other investors. This can help you to know more about the product or service provided by the company.
The information will help you understand the company better and it is advisable to select the company that you understand. You can select the companies as per your interest as well. As an example, if someone is working for Pharma Company then he or she is aware of the Pharma companies and can select the stock related to Pharma Company.
#3. Choose The Companies Having A Competitive Advantage
Once you have chosen the companies you want to invest with, the next step is to do the analysis of the competitive advantage of the company. In this, you will analyze the competitive advantage a company has within the same industry.
A high competitive advantage for a company means to have more sustainability in the industry which further implies that the company is difficult to be displaced by its competitors.
As an example, a company with a huge brand name has strong pricing power, market demand and patents giving it a large competitive advantage. Thus, during the initial stages of your investment, you should select the companies with a high competitive advantage to ensure that you will get profit out of them.
#4. Find Out The Low Debt Levels
In addition to the screening criteria discussed in Step1, it is important to consider the debt level for any company. This is because the reduced debt level for a company means the increased profits which show the good financial health of the company and thus making it better for the investment.
The simple way to check the financial health of a company is to go through the balance sheet of the company where current liabilities and long term debts of the company are listed. Current liabilities mean the debts of the company that the company needs to pay within a year and long term debts mean the debts that comes after the period of a year. Thus the companies with large long term debts are risky to invest in as it may lead to the bankruptcy of the company in the future.
Another way to check the financial health of the company is to find the long-term debt ratio as it measures the long term debts of a company with respect to the total assets of the company. If the calculated ratio is more than 1 then it implies that the company has high long term debt as compared to the assets which mean it is risky to invest in the stocks of the company.
#5. Identify The Right Stocks Using Ratios RoE & RoCE
It is important to understand the terms RoE and RoCE before investing in the stocks of a particular company. RoE is the percentage of net income of a company and its part is returned to shareholders.
Using RoE, you can find out the profitability of the company and thus you can calculate the profit based on the amount you have invested. RoCE defines the company’s efficiency to utilize all the available capital in order to create maximum profits.
The large value of RoE and RoCE indicates the company has great potential for growth in the future. Thus it is suggested to find the RoE and RoCE for the companies before selecting them for investing stocks.
#6. Honest & Competent Management
One of the main reasons that people don’t have faith in the share market is fraud management. Many cases of committed fraud and misled investors by companies are seen in the past which causes a huge loss to investors.
For that reason, always invest in the companies having transparent and honest management. Companies like Avanti Feeds run by honest management (MD/CEO) have always created massive wealth for its shareholders.
A Couple of Ways To Know If The Management of The Companies Is Component & Honest:
Search For Fraud & Track Record:
Carry on the right research by using Google and check the names of the management if there is any reporting of fraud against the company chiefs. You can also check the qualifications of the executives of the company.
Read Annual Reports:
If you want to get a complete understanding of the company and its executives then you can read annual reports. It will help you understand the strategy, future vision, and analysis of the management for the company.
The annual report can be downloaded from the company website or you can email the concerned investment relations and get the annual report copy emailed.
Look Out For Promoters Shareholding:
Higher the promoter’s shareholding, the positive indication it sends to the market. The promoter’s shareholding may vary in the past few years. If promoters are investing more in the company, it means the company is good enough to invest in it.
#7. Buy The Stocks At Right Price
This is the last step where you need to find out the right price that you should pay for a stock. Try to find a company which is most valuable and minimum stock price. Investing at the right price is important because it gives you the margin of safety and protects your investment. Also, if you buy stocks at a lower price there is more chance of getting more profits in the future.
Never invest your entire money in the market initially. Always start with a small amount and check what you have learnt because it is very important to learn than earn for the investors during the initial stage. You can also start with a small amount of INR 1000. Once you have learnt and gained confidence, you can put a big amount on the market.
Diversify Your Portfolio
You need to make your portfolio diverse. This can be done by putting money into different companies. It is not advisable to put the entire money in one stock.
For example, two stocks of HDFC securities and ICICI securities in your portfolio are not a diversified portfolio. Even though they are different companies but both companies belong to the same sector. If there is a crisis in the finance sector, at that time your portfolio might be in loss.
Buying stock from different sectors like banking and steel is called a diversified portfolio. These both are different sectors which will help you gain profit in the share market.
Make The Investment In Blue-Chip Stocks
Investing in Blue Chips can help you gain much profit than other funds because these are the stocks of companies with a good reputation in the market for quite long and having a good record of compatible growth over many years.
For example Infosys, ICICI Bank, Unilever, etc. There are some other examples of Blue Chip funds such as SBI, Reliance industries, and more.
These companies are performing with stability over many years and there is a very little risk than other companies. That is why investing in Blue chip stocks is safer to invest than to other companies.
For the beginners, it would be good to start investing in Blue Chips. As you learn new things about investing and gain confidence, then you can invest in small-cap and mid-cap companies.
Analyze Yourself Before Acting On Free Tips/Advice
Following the tips or advice of your friends/relatives is the biggest reason for losing money in the share market. The circumstances of the share market change every minute. May be your relative has invested in the stock when it was a lesser price or he/she has a different exit strategy. So, following them blindly may end up with a big loss. Always carry reliable research before investing.
Do Not Follow The Crowd Blindly
There are many people who lose their money by following the crowd blindly. A man invested in the market because one of his friends gained a double return in just 2 months. But he ended up with a loss of 25,000 due to his blind investment.
Invest In What You Know & Understand
It is always advisable to invest in the companies you know about because lending your money to a stranger you do not know about may end up with a huge loss. Will you buy a company which develops software even you do not know anything about IT companies?
If not, then how can you invest in the companies you have zero knowledge about?
Set Correct Expectation Goals
Expecting your money getting double in three months from the share market is highly unrealistic expectations. Always set logical expectations from the market. People are satisfied with 4% interest from the saving accounts in the banks, but a 30% return in a year appears to be an underperformance for them.
Have Discipline And Follow Your Plan/Strategy
People get confused when their portfolio performs too good or too bad in the beginning. Most of the people make their investments double just in a couple of days after seeing their stocks doing well which ends up with a loss in the long term.
Likewise, some people withdraw their money soon and do not get profits when their stocks perform well. So always have discipline and follow the strategy.
Invest Regularly And Increase Your Investment Amount Continuously
You will get the best returns in the stocks if you put your money for a long time. But do not invest all your money in just one time and wait for the long term to see what you earn. Just keep investing regularly whenever you get good opportunities and increase the amount as your savings increase.
Continue Your Education
Keep learning new things. The circumstances of the share market change every second. There are many new things which you will keep learning with experience and time. You can carry on with the share market if you also proceed with education.
It’s Your Turn Now!
To sum up, investment in share market is a tedious and risky job but with some good approach you can earn profits and save your money by getting into loss. I hope the information and tips shared by me prove to be quite informative and helpful for you in making your stock investment journey easy.