Everyone wants to earn money and become rich and have a good life. However, you cannot live your dream life if you just depend on your monthly paychecks. It would be best if you made some investment, i.e., investment in stocks, mutual funds, bonds, derivatives. You need to compound your money.
Compound Interest is the eighth wonder of the world, who understand it –earns it, who does not – pays it.
Albert Einstein
Above quote is highly encouraged by the legendary investor Warren Buffett.
As a beginner, everyone is very curious about money and investing and so was I so I asked about investing to all my friends and watch many YouTube videos and here are the suggestions I got:
Read finance-related articles
Try some courses
Daily read The Economic Times
Keep an eye on investor’s play.
Learn investing jargon. Blah, blah, blah
No one told me how to go from 0 to 1. Everyone has its level of information, and there is already too much out there.
It takes me 2 years to understand things related to investing, so I thought I should help the new investors to see the starting line of investing.
Where is the starting line?
Too much information. Too much confusion.
Wait. Please don’t get frustrated, Let’s make this hurdle easy to understand.
This article is going to be very long, so it is better if you avoid all your disturbances and focus on this reading only.
Ready? Let’s ride the tide.
Some steps you need to consider before investing:
Introduction to the Stock Market
Choosing broking platform
Selection of stocks
Without wasting any time, Let’s jump to Step 1:
Step 1 - INTRODUCTION TO STOCK MARKET:
Stock Market is the most robust business in the world due to its transparency and is emotionless. You commit a mistake, and you get chased.
You can call this a legalized gambling.
I don’t understand how people choose a stock based on news channels, any recommendation from a friend and sometimes on their gut instinct. Also, when they suffer losses, they started to speak ill about the investing world. Would you like to buy a shirt without looking at its quality? Of COURSE, NO.
So how can you invest in a stock without checking its fundamentals?
How does Stock Market work?
Have you ever been to a supermarket? Obviously, yes. You like to go there because, at a single place, you can buy a different kind of item in one shop. It is very convenient than driving around to dairy shop, vegetable vendors and cosmetic shops.
Stock Market works the same way. BSE/NSE is a supermarket where shares of a company are bought and sold.
However, there is one catch. The prices of products in a supermarket is fixed, but in Stock Market, the prices of stocks are varying every second because of supply and demand. If buyers are more (Demand) than sellers (supply), then the price moves up. Similarly, if sellers are more than buyers (Supply > Demand), the prices will fall.
Moreover, this supply and demand work on many factors like positive and negative news about the company like company results, new product launch and many more.
The price of a share doesn’t only reflect the company’s current value but also reflects the growth of the company in the future.
Buying = Bid Price = The price at which buyers want to buy stocks.
Selling = Ask Price = The price at which sellers want to sell stocks.
All the fluctuation in prices are electronically monitored and is controlled by electronically matching bids and offers of every stock. From the hundreds or thousands of bid-ask offers for a given share that exists at a given time in ELOB, the software will seek matches, and when the bid and ask matches, the order gets executed, and that price becomes the last traded price (LTP). The LTP is listed and becomes the current stock price. It will remain the same until the software finds a new match of the bid and ask offers.
This is how supply and demand affect the price of the stock. When investors are ready to pay a higher price, then stock prices appreciated and in another case, when they don’t want to pay more than its current price, then the stock price gets depreciated.
We have stock exchanges BSE/NSE who have a vast number of algorithms which monitor all these stock prices fluctuation.
You can get all these information on the web or the software your broker gives you.
You can also get this information on www.moneycontrol.com or
the moneycontrol app(an example is illustrated in right).
This is one of the finest app for Indian Stock Market and other news also.
After having a short description of the stock market, you have 1 question in mind, how can I buy and sell stocks?
Here is the answer:
You cannot directly invest in the stock market, which means you need a stock broker who will work as a mediator between you and exchanges and helps you to place buy and sell orders.
In Step 2, you will see how to choose a good broker.
Step 2 - CHOOSING BROKING PLATFORM
Buying a stock is as simple as recharging your mobile number or transferring money.
With the help of technology, Stocks brokers make it very easy to open a trading platform and start running in a couple of days.
There are more than 50 stock brokers in India, and mostly they offer you similar services; the only difference is pricing and sometimes technology.
Some of the famous stock brokers in India are Motilal Oswal, Zerodha, Fyers, Angel Broking, and HDFC Securities.
There are 2 types of brokers in India:
1. Discount brokers are those brokers who offer cheap brokerage plans than Full-Service Brokers. They only provide the trading facility. Mainly they offer a flat fee to their clients.
In the pastight years, thousands of investors shifted from full-service brokers to discount brokers.
There can also be a reason for shifting that discount brokers have better trading platforms than full-service brokers.
Ex:-
If you trade for a value of Rs.100000 ( 1lakh), then you would have to pay Rs.500 [If you are with full-service brokers] and Rs.40 [If you are with a discount broker].
Also, very importantly, brokers have nothing to do whether you make profits or losses. They care only about the brokerage charges which you pay them at the time of buying and selling. There are more than 50 discount brokers in India.
Below is the list of Top 5 discount brokers in India.
Zerodha
5 Paisa
Fyers
Upstox
Samco Securities
2. Full-Service Brokers (Traditional Broker) are those brokers who provide the clients with complete hand-holding when it comes to market research, Intra-day tips, company reports, IPOs, and much more.
These brokers charge commissions on every trade the clients execute.
I don’t have an account with full-service brokers.
Below is the list of Top 5 Traditional brokers in India:
Motilal Oswal
HDFC Securities
ICICI Direct
Axis Securities
Sharekhan
I am using Zerodha and also recommend you to use it because it will save you a lot of brokerage charges and offers you with many benefits.
However, you can also go with another broker according to your preferences.
Processes for opening a demat account:
Get a PAN card
Address Proof (Aadhar Card)
Personal Bank Account
Last 6 months bank account statement
If you have all these documents ready, you can contact a broker and start investing in the next 72 hours.
Take your decision wisely. It takes time to become a professional and good investor, which will not happen overnight. However, a wrong decision now can become a big hurdle in the future.
Note: If you open a 3-in-1 account, you won’t need to find a stockbroker because the trading account is also included in that.
Full-service brokers mainly open 3-in-1 accounts.
So, after you get a good broker, the next step is how to evaluate a stock.
Now, let’s move to the most important and crucial step: the center of all processes .i.e., stock selection.
STEP 3 - SELECTION OF STOCKS:
So, you finally decided to invest in stocks.
OK. Let’s begin the journey.
Choosing the right company sounds like the first step in building a portfolio.
When you buy a stock, have a long-term perspective and remove your emotions with short-term market movements because the value of your investment depends on the health of your business.
“Never invest in a business you can’t understand.”
Never invest in a business you can't understand.
- Warren Buffett
Similarly, buying the stock is like buying a small part of any business, so buy shares of only that company whose business model you understand.
Most importantly, avoid the hype, during the dot-com bubble and real estate bubble, lots of investors invest in stocks without understanding the companies fundamentals and face losses.T
The stock analysis is of two types:
Technical Analysis
Fundamental Analysis
Technical Analysis deals with charts and intraday trading, and it is not easy to understand easily. It is the study of historical market data, including price and volume. Technical Analysts study the charts and make trades.
If you want to become a good technical analyst, you should pursue NSE certification for its deep understanding.
Fundamental Analysis deals with evaluating a stock in an attempt to access its intrinsic value using economic, financial, and other qualitative and quantitative factors.
Let’s look at some of the parameters that one should look at before investing:
P/E Ratio:
The price-to-earnings ratio is a very popular method for valuing a company in any sector. It can be measured by its current share price relative to its per-share earnings.
P/E Ratio – Market Value per share/Earnings per share
Return on Equity:
It shows how much profit a company is making for its shareholders after all its expenses. The higher the ROE, the better is it to invest.
ROE – Net Annual Income/Shareholders Equity
Earnings Per Share(EPS):
It shows how much of a company’s profit is assigned to each share of a company.
EPS – Profit – Dividend / No. of shares outstanding
The EPS formula indicates a company’s ability to produce net profits
for common shareholders.
Projected Earnings Ratio(P/E):
It shows the next one-year earnings growth rate of the stock.
Price-to-Sales Ratio(P/S):
This ratio values a company’s stock price as compared to its revenues.
Price-to-Book Ratio:
This ratio compares a stock’s book value to its market value. It appears in the company’s book.
Dividend Payout Ratio:
It shows the dividends paid out to the stockholders to the company’s total net income.
Return on capital employed(ROCE):
It shows how efficiently a company is using its capital to generate profits. It is considered one of the best profitability ratios.
ROCE – Earnings Before Interest + Tax / Capital Employed
Earnings Yield:
It shows the percentage of each rupee invested in the stock that the company earned.
Gross Profit Margin Ratio (GP):
It is the ratio that compares the gross margin of a company to its revenue. In that words, it shows how much profit a company makes after paying off its COST OFF GOODS SOLD (COGS).
Gross Profit Margin Ratio – (Revenue-COGS) / Revenue
Debt-to-equity Ratio:
It is a leverage ratio that calculates a company’s total debt and financial liabilities against the total shareholder’s equity.
D/E = Total Debt / Shareholders Equity
Interest Coverage Ratio (ICR):\
It is a ratio used to determine the ability of a company to pay the interest on its total debt.
ICR – Earnings Before Interest+Tax / Interest Expense
Dividend:
It is the share of profits a company pays out to its shareholders.
You will get all these data on the Moneycontrol app.
Remember, these are just some tools to analyze a company. There is no single ratio or number which can fully convince you to invest in that company. Likewise, these ratios can’t give you any buy or sell recommendations by themselves.
As you study more and more, these numbers will give more explicit pictures.
Some points to consider before investing:
Never make your investment based on tips:The stock Market is a very dynamic field, and one needs proper education to make money from it.
People don’t want to invest time and money in education, so they start to find HOT TIPS/HOT STOCKS, and then they lose money. They don’t do proper research and invest with guts. The market doesn’t work this way, and here circumstances change every second.
Before making any investment, always have an exit plan.
So, better to avoid investing based on tips and advice.
Start with small:
First Learn, then Earn. Invest a small amount of money in the beginning and test what you have learned from that investment. Then, as you are getting more experience and knowledge, you can increase the amount.
Diversify your portfolio:
Diversification is good for your portfolio. So, in the beginning, when you are in the learning stage, choose companies from different industries. Because if there is a recession in a particular sector, then another sector supports your portfolio.
A diversified portfolio can be like TCS, Britannia, Maruti Suzuki, and all are from different industries. TCS is from the IT sector, Britannia is from the FMCG sector, Maruti Suzuki is from the Automobile sector. This is called diversification.
However, don’t over-diversify your portfolio. Instead, select the companies whose business model you understand.
Make a disciplined approach and follow it:
In investing, there are ups and downs in your portfolio. At the time of a major crisis, your portfolio may not perform well but don’t get distracted whether your portfolio is green or red. If you have a disciplined approach and you know what you are doing, you will end up in profits in the long run.
Hence, always have a disciplined approach
Invest regularly:
Investing is not like – you invest 10lakh rupees and then wait for the next 10 years to see how much return you got. Instead, start with small and increase your investment time-to-time with a long-term goal in mind.
But don’t take a loan or borrow from anyone to invest. Instead, use a smaller part of your savings and grow it. Make a good opportunity your best move.