How to start investing in India
Before I begin with the know-how of how to invest in the right possible manner in stock market, I would like to share a small personal experience when I entered as a new player. Being a finance student I thought I was well equipped with the knowledge and statistics of the companies. I would need only a few guidance tips from a broker, maybe. That was my mistake number one. Next, I thought its some scheme to double the money. So I ended up investing most of my savings. Which was my mistake number
2. Last but the major was not only the wrong selection of companies but also the term of the investment. Deciding on the future goals is crucial to the locking up period of your cash.
To begin with a guide there are various types of investors in India
1. No risk-takers-
These are the ones who are never interested in the Equity market because they find it risky, they don’t want to depend on the Companies for their hard-earned money. 2. Investors with a vision- These are totally the opposites of the no-risk taker category. They hold a very strong vision of market growth and strategies. They work for long term events, these are the individuals who would make the investment strategies look like a cakewalk but only because of their stronghold in financial knowledge and expertise.
2. Go against the flow-
These types of investors have their own strategies and mindset and they stick to their own plans. They are confident players and trust themselves. In going against the flow they make sure not fall prey to the dubious schemes of the agents or the financial product sellers.
3. Bookish knowledge seekers-
Each and every information would reach them from somewhere, they have read it in some random newspaper, heard it at a stock discussion Forum. Basically they are always ready for advises, whenever or wherever you need Them or even when you don’t. 5. Advice takers- This is the category I fell into when I was a beginner. I practically took Advises from anyone who I thought was speaking the language of the markets. Being in this category you would be only wasting your money and time. Moreover you Would also lose the interest and confidence eventually. To begin with the guide let us Take into consideration this last category of investors so that you could save yourself from the losses and would come out as a prospective winner.
Let us follow a step by step strategy for a smooth investment:
1. Selecting the right Stocks for your portfolio
Instead of going through a vague approach or by relying on the information so heard would do you no good.
Rather careful analysis of the in hand financial information about the Companies should be done initially.
Market Cap > Rs. 500 cr Growth in sales and Profit >10% Constant increase in EPS for past 5 years atleast Debt Equity Ratio < 1 ROE > 20% Price to Book value <= 1.5 ideally Price to Earnings< 25 ideally Current Ratio > 1
These information are easily available on sites like Moneycontrol or EquityMaster.
2. On the basis of the stocks filtered narrow it down further by understanding the Company. Trust me it is not some rocket science. The procedure is simple, start with understanding the industry type of the Company. The Goodwill in the market, financial comparisons with the competing companies of the same industry. The methodology which the selected company follows. Its long term goals, financial standing in terms of loans and Borrowings.
3. After narrowing down your selection to the companies you somewhat understand proceed with the next step. Elaborating the last step it is vital to understand the Moat that Is the competitive advantage that the company selected by you has over the other Companies competing against the one you are targeting. A competitive advantage Over not only the players present but also over the emerging players in the sector.
Ask these two questions to yourself: What is it that makes it stand out? What is it that makes it reliable for a long term venture?
4. Picking up another important factor from step two would be the amount of debt of the company you selected. Its credit ratings from a reliable credit rating agency. A simple method to understand a companies dependency on the debt would be to look at the Balance Sheet. Checking out the current liabilities and long term debts would give a transparent Outlook. But if you are not well versed with the Balance sheet or have difficulty in understanding the financials best way to gain clarity would be going through the Auditor’s report. Two important ratios to be focussed are the Debt-Equity ratio and the Current ratio. Debt Equity Ratio- Dividing total liabilities by shareholder equity would give you a debt-equity ratio. It is used to evaluate a company’s financial leverage.
A low debt-equity ratio indicates low risk. Current Ratio- It is the liquidity ratio that measures whether the company has enough resources to meet its current liabilities or not. Current assets divided by Current liabilities are the formula for the current ratio.
5. Once you are done with the above four steps of analysis comes the next step which Again is related to the ratio analysis. To increase shareholders’ wealth, the potential for future growth is very important and it can be tested by using RoE and RoCE ratios. A company with a high Return on Equity and a high Return of Capital Employed shows Higher efficiency.
Once you have completed the above selection criteria following additional points must be kept in mind.
● Simplify your targets that is whether you want to invest in for the long term or for the short term.
● For short term targets, you would need to be very careful about the right prices while buying a stock. Check out the Intrinsic prices of the shares and buy only when the price offered is lower than the intrinsic price.
● Be ready to short as soon as the price crosses the intrinsic price in case you target the short term.
● Always invest in a diversified portfolio. Never put all your money on one sector itself. Keep updated with the latest Government policies that relate to the sectors you are depending on.
● If you are a new investor never ever invest all your money on shares. Rather start with a minimum amount. Gradually you will learn and grow.
● Last but not least check out the competencies of the management of the company you are targeting. Along with the fraud track in the past. To do that analyze the annual reports, promoters shareholding etc.
This was my brief guideline for a new investor. Hope it helps.
Hope it helps !!
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