How to start investing in Stocks? Ask me Anything
How to start investing in Stocks?
In a recent survey by Zerodha, it was found that Indian youth are NOT confident about the financial future and investment in stocks which led them to found stock trading app Zerodha.
Eight out of 10 are NOT confident about their current financial situation, while nine out of 10 feel they are NOT financially ready for the future.
Most cited lack of financial literacy skills in terms of investing and financial planning as one of the main reasons for the pessimistic outlook.
Well, the good news is that financial literacy can be easily obtained and mastered if one puts in the effort and determination to learn.
To begin, I will highlight 4 essential steps you need before you even open a stock trading account.
A classic case of wealth maximization through stocks can be understood through MRF, Page Industries and Eicher Motors stocks.
Why these stocks specifically because these have been considered as classical examples in terms of industry leadership, corporate governance and cutting edge product.
India's most expensive stock is MRF which is a short form of Madras Rubber Factory which manufactures tires for automobiles and other allied industries. It presently trades at Rs 64,000 some change and it's leading its growth.
Eicher Motors the Indian competitor to Harley Davidson with its product Royal Enfiled range of bikes, and Eicher range of trucks and buses too. I started off as a government contractor of bikes and relevantly went on to serve the private market too. Its shares presently trade Rs 21,000 some change and some change
Another company Page industries, which is the owner of innerwear brand Jockey, which currently trades at INR 24,300 some change.
Why I'm highlighting these stocks because it'll not only help us understand the further read better but also understand the technical details as these brands we interact with on daily basis in some way or the other.
MRF started off with Rs 11 a share during it's IPO, Page industries started off with INR 360 per share and Eicher Motors with INR 254 a share price.
MRF the highest stock price of worth Rs 60k a share from Rs 11 in 1993.
It is evident from these 3 stocks that they're in the market for an incredibly long period of time, they're the market leaders and yet they continually innovate the products to stay ahead of the competition.
What we have to understand here is that why other companies in the same sphere couldn't able to be as successful as them.
No doubt, sales is an important point in the valuation of the shares, what is worth important is understanding the market.
Understanding the market from both the company perspective and consumer perspective too.
But first, choose an industry which you're deeply passionate about, it can be any industry ranging from FMCG to automobiles, Mobiles, Ceramics, Manufacturing be it anything.
Because without being passionate about anything you wouldn't be able to understand or learn regarding the consumer and company perspectives. Once, chosen regarding your industry see where the industry is headed towards 5 years from now. This can be known from the company blogs, customer preferences, leadership interviews, industry requirements and the quality of the products too.
With this, you'll be able to understand the difference between the company's products are more advancing to be superior towards the next 5 years timeline and accordingly, you've got your company to get to know it better.
Once you've understood your industry sensitivity and its consumer's preferences look at the company's leadership team it's CEO, CFO, MD, and other C level executives too. Plus, read their whole profiles clearly through LinkedIn and other sources and make a list of their working style and exceptional achievements and value chain.
Higher individual achievements and better the company's performance would be. In case any company's leadership team has fewer achievements to its name refrain from investing in that company.
After these 2 steps look at balance sheets and sales of the company's products.
The most crucial part is the Assets and liabilities with sales being the most important critique.
Earnings per Share (EPS): How much of a company's profit is assigned to each share of stock? Earnings per share are calculated as net income fewer dividends on preferred stock divided by the number of outstanding shares.
EPS = Net Earnings / Outstanding Shares
Price to Earnings Ratio (P/E): This ratio compares the current sales price of a company's stock to its per-share earnings.
The formula: P/E = Stock Price / EPS
Projected Earnings Growth (PEG): PEG anticipates the one-year earnings growth rate of the stock.
Price to Sales Ratio (P/S): The price to sales ratio values a company's stock price as compared to its revenues. It's also sometimes called the PSR, revenue multiple, or sales multiple.
Price to Book Ratio (P/B): This ratio, also known as the price to equity ratio, compares a stock's book value to its market value. You can arrive at it by dividing the stock's most recent closing price by last quarter's book value per share. Book value is the value of an asset as it appears in the company's books. It's equal to the cost of each asset less cumulative depreciation.
Dividend Payout Ratio: This compares dividends paid out to the stockholders to the company's total net income. It accounts for retained earnings, income that is not paid out but rather retained for potential growth.
Dividend Yield: This, too, is a ratio: yearly dividends compared to share price. It's expressed as a percentage. Divide dividends paid in a one-year period per share by the value of a share.
Return on Equity: Divide the company's net income by shareholders' equity to find its return on equity. You might also hear this expressed as the company's return on net worth.
Watch out for these calculations online or from your Demat account dashboards too. It's also available on the company website in the financial information section too.
Understand and take wise steps, it cannot be understood here in this blog this will require additional expertise for you to understand it better.
Additional effort can be put on understanding where Insurance, Mutual Fund Companies and Investment banks are investing. This will give you a greater level of confidence to invest without hesitation provided the trust of such companies being vested on such companies or industries and same is known by reading newspapers, financial papers of companies AGMs, or mutual fund company's fund allocation plan provided on many websites for free.
After all this, also look at the brand positioning in the market too. the product launch line up, newer products, market size, and market share all these are essential and required to make strategic bets on the companies.
Believe it or not, stocks rise up on the basis of behaviors and there's plenty of courses on behavioral finance. One example of behavioral finance is that, let's stay a bank which is performing average and giving good returns, there's a miscommunication in the market that bank's gonna close down and hence most of it shareholders start selling their shares to avoid losses or negative returns and hence bank eventually faces losses and it's closed down.
Here there's no loss to the bank through its operations but negative publicity had made it worst. Little does anybody know, whenever a company closes down its assets and cash balances would be used for the company's shareholders.
The share market is regulated and monitored by SEBI, Securities and Exchange Board of India. which is headed by Ajay Tyagi presently. It regulates the stock exchanges, gives approvals for companies to raise and disburse finances, even when any company closes it directs NCLT - National Company Law Tribunal to complete the dissolution process and see there are no losses to the people connected to such companies. Recently issues of companies like Bhushan Steel, Alok Industries, IL&FS, and others have been completed at the discretion of SEBI by NCLT successfully and in fact, made it acquired by much bigger players and made it their subsidiary Alok Industries acquired by Reliance-JM Financial Joint Venture, Bhushan Steel is acquired by TATA Steel successfully without incurring any losses, Ruchi Soya to is being acquired by Patanjali too, Essar group by Rosneft of Russia completed last year.
Fortis Healthcare, Diageo, IL&FS, Nirav Modi cases are still going on.
It's evident that investors don't have to be concerned about their losses when companies go bankrupt, or loss bearing, there are enough policies and preventive actions in place to protect the investor's interest by SEBI. This doesn't mean you are free to invest anywhere and earn losses eventually without proper calculations.
That's why 4 essential steps to start investing in stocks written here are important for you to get started because the above steps are for your start research regarding companies and the below 4 steps are for you to plan your finances.
1) Know why you are investing
An investor without investment objectives is like a traveler without a destination. ~Ralph Seger
Be very clear of the reason on why are you embarking on this investment journey. It is not good enough to say generic terms like “I want to make my money work harder for me” or “I want to be a millionaire”. Instead, but as precise as possible. Because you will face many obstacles and lose money along the way. So if you are not clear of your objectives, very likely you will lose faith and fall to the wayside. Some good investment objectives you can consider are:
1. I want to double my stock investment of INR XXX by 5 years.
2. I want to grow my retirement fund to INR XXX when I reach 50 years old.
3. I want to have a passive income of INR XXX very month by 45 years old.
This is what I considered as the most important step as you will very soon realize that there are hundreds of investing strategies out there with thousands of stocks to pick from.
Each strategy or stock will give you different results. So unless you are 100% sure of what you are looking for, you most likely will get confused and lost.
Also, make your investment goal simple and measurable. Make sure you celebrate small gains along the way.
2) Understand the Type of Investment strategies
Once you are set on your investment objectives, the next step is to explore the different stock investment strategies out there and pick the one that will be the best alignment with your objectives.
As one tries to explore the different investing strategies, beginners will be totally confused as terms like value investing, swing trading, options trading, momentum investing, etc. will be popping up everywhere. So where do you begin?
To help you navigate the investment landscape, you should ask yourself this question. How much time are you willing to spend managing your stock portfolio? Accordingly, go through the above-mentioned steps.
If you can afford greater than 6-8 hrs a week, you can look at “active” trading strategies.
An example of “active” trading strategies includes Swing Trading, Options Trading, Position Trading, momentum trading, etc. Typically, investors that pick these kinds of strategies aim to generate cash flow out of their trades to supplement their daily expenses.
Obviously, when you employ these kinds of strategies, it calls for close monitoring of the price movement and does lots of buying and selling frequently.
But if you can only afford maybe 2-4 hrs a week max, you should only consider “passive” investing strategies.
An example of “passive” investment strategies includes value investing,
Dividend investing, fundamental investment, etc. Investors who employ these kinds of strategies have a longer investment time horizon and don’t mind riding the ups and downs in the short term to get a bigger return in the longer term.
I see so many beginners going after the strategies that give them the highest possible return but didn’t really understand what it takes. This will result in a mismatch of expectations and effort required.
3) Set aside a small percentage of Investment money
If you want to try a little stock picking, set aside a small percentage of your investment money to begin with. A good guideline to follow is 10% to 15% of your portfolio or an amount that will not cause you to lose your sleep at night if you lose it all.
Why not more than that you may ask.
Well, the answer is pretty simple, stock picking has an element of risk. If you commit too much of your investment capital to it, it will affect your buy and sell judgment. Buying and selling of any stocks should be objective and never emotional.
Use the small percentage of investment money to try out the different strategies to see which one suits you most. Think of it as tuition fees to learn the rules of the trade and to strengthen your psychological defense against the ups and downs of the market.
Only when you are more comfortable with your strategy, then increase your portfolio investment value.
To start, as suggested above pick, a stock of an industry that you are familiar with. For example, if you work in the banking industry, try investing in bank stocks first.
4) Learn how to Invest
“An investment in knowledge pays the best interest.” – Benjamin Franklin
Pick up a few books to learn more about the significance of Investing. Here are some good books for beginner investors:
1. “Rich Dad, Poor Dad” by Robert Kiyosaki
2. “Think and Grow Rich” by Napoleon Hill
3. "Common Stocks Uncommon Profits and other writings" by Philip A. Fisher
4. "The Intelligent Investor" by Benjamin Graham
That's it from this blog, hope this gives you a much-needed clarity on investing. Share it with your investor friends who are starting to invest or people who are stuck in between the jungle of stocks or shares. This would be their guide.
In a recent survey by Zerodha, it was found that Indian youth are NOT confident about the financial future and investment in stocks which led them to found stock trading app Zerodha.
Eight out of 10 are NOT confident about their current financial situation, while nine out of 10 feel they are NOT financially ready for the future.
Most cited lack of financial literacy skills in terms of investing and financial planning as one of the main reasons for the pessimistic outlook.
Well, the good news is that financial literacy can be easily obtained and mastered if one puts in the effort and determination to learn.
To begin, I will highlight 4 essential steps you need before you even open a stock trading account.
A classic case of wealth maximization through stocks can be understood through MRF, Page Industries and Eicher Motors stocks.
Why these stocks specifically because these have been considered as classical examples in terms of industry leadership, corporate governance and cutting edge product.
India's most expensive stock is MRF which is a short form of Madras Rubber Factory which manufactures tires for automobiles and other allied industries. It presently trades at Rs 64,000 some change and it's leading its growth.
Eicher Motors the Indian competitor to Harley Davidson with its product Royal Enfiled range of bikes, and Eicher range of trucks and buses too. I started off as a government contractor of bikes and relevantly went on to serve the private market too. Its shares presently trade Rs 21,000 some change and some change
Another company Page industries, which is the owner of innerwear brand Jockey, which currently trades at INR 24,300 some change.
Why I'm highlighting these stocks because it'll not only help us understand the further read better but also understand the technical details as these brands we interact with on daily basis in some way or the other.
MRF started off with Rs 11 a share during it's IPO, Page industries started off with INR 360 per share and Eicher Motors with INR 254 a share price.
MRF the highest stock price of worth Rs 60k a share from Rs 11 in 1993.
It is evident from these 3 stocks that they're in the market for an incredibly long period of time, they're the market leaders and yet they continually innovate the products to stay ahead of the competition.
What we have to understand here is that why other companies in the same sphere couldn't able to be as successful as them.
No doubt, sales is an important point in the valuation of the shares, what is worth important is understanding the market.
Understanding the market from both the company perspective and consumer perspective too.
But first, choose an industry which you're deeply passionate about, it can be any industry ranging from FMCG to automobiles, Mobiles, Ceramics, Manufacturing be it anything.
Because without being passionate about anything you wouldn't be able to understand or learn regarding the consumer and company perspectives. Once, chosen regarding your industry see where the industry is headed towards 5 years from now. This can be known from the company blogs, customer preferences, leadership interviews, industry requirements and the quality of the products too.
With this, you'll be able to understand the difference between the company's products are more advancing to be superior towards the next 5 years timeline and accordingly, you've got your company to get to know it better.
Once you've understood your industry sensitivity and its consumer's preferences look at the company's leadership team it's CEO, CFO, MD, and other C level executives too. Plus, read their whole profiles clearly through LinkedIn and other sources and make a list of their working style and exceptional achievements and value chain.
Higher individual achievements and better the company's performance would be. In case any company's leadership team has fewer achievements to its name refrain from investing in that company.
After these 2 steps look at balance sheets and sales of the company's products.
The most crucial part is the Assets and liabilities with sales being the most important critique.
Earnings per Share (EPS): How much of a company's profit is assigned to each share of stock? Earnings per share are calculated as net income fewer dividends on preferred stock divided by the number of outstanding shares.
EPS = Net Earnings / Outstanding Shares
Price to Earnings Ratio (P/E): This ratio compares the current sales price of a company's stock to its per-share earnings.
The formula: P/E = Stock Price / EPS
Projected Earnings Growth (PEG): PEG anticipates the one-year earnings growth rate of the stock.
Price to Sales Ratio (P/S): The price to sales ratio values a company's stock price as compared to its revenues. It's also sometimes called the PSR, revenue multiple, or sales multiple.
Price to Book Ratio (P/B): This ratio, also known as the price to equity ratio, compares a stock's book value to its market value. You can arrive at it by dividing the stock's most recent closing price by last quarter's book value per share. Book value is the value of an asset as it appears in the company's books. It's equal to the cost of each asset less cumulative depreciation.
Dividend Payout Ratio: This compares dividends paid out to the stockholders to the company's total net income. It accounts for retained earnings, income that is not paid out but rather retained for potential growth.
Dividend Yield: This, too, is a ratio: yearly dividends compared to share price. It's expressed as a percentage. Divide dividends paid in a one-year period per share by the value of a share.
Return on Equity: Divide the company's net income by shareholders' equity to find its return on equity. You might also hear this expressed as the company's return on net worth.
Watch out for these calculations online or from your Demat account dashboards too. It's also available on the company website in the financial information section too.
Understand and take wise steps, it cannot be understood here in this blog this will require additional expertise for you to understand it better.
Additional effort can be put on understanding where Insurance, Mutual Fund Companies and Investment banks are investing. This will give you a greater level of confidence to invest without hesitation provided the trust of such companies being vested on such companies or industries and same is known by reading newspapers, financial papers of companies AGMs, or mutual fund company's fund allocation plan provided on many websites for free.
After all this, also look at the brand positioning in the market too. the product launch line up, newer products, market size, and market share all these are essential and required to make strategic bets on the companies.
Believe it or not, stocks rise up on the basis of behaviors and there's plenty of courses on behavioral finance. One example of behavioral finance is that, let's stay a bank which is performing average and giving good returns, there's a miscommunication in the market that bank's gonna close down and hence most of it shareholders start selling their shares to avoid losses or negative returns and hence bank eventually faces losses and it's closed down.
Here there's no loss to the bank through its operations but negative publicity had made it worst. Little does anybody know, whenever a company closes down its assets and cash balances would be used for the company's shareholders.
The share market is regulated and monitored by SEBI, Securities and Exchange Board of India. which is headed by Ajay Tyagi presently. It regulates the stock exchanges, gives approvals for companies to raise and disburse finances, even when any company closes it directs NCLT - National Company Law Tribunal to complete the dissolution process and see there are no losses to the people connected to such companies. Recently issues of companies like Bhushan Steel, Alok Industries, IL&FS, and others have been completed at the discretion of SEBI by NCLT successfully and in fact, made it acquired by much bigger players and made it their subsidiary Alok Industries acquired by Reliance-JM Financial Joint Venture, Bhushan Steel is acquired by TATA Steel successfully without incurring any losses, Ruchi Soya to is being acquired by Patanjali too, Essar group by Rosneft of Russia completed last year.
Fortis Healthcare, Diageo, IL&FS, Nirav Modi cases are still going on.
It's evident that investors don't have to be concerned about their losses when companies go bankrupt, or loss bearing, there are enough policies and preventive actions in place to protect the investor's interest by SEBI. This doesn't mean you are free to invest anywhere and earn losses eventually without proper calculations.
That's why 4 essential steps to start investing in stocks written here are important for you to get started because the above steps are for your start research regarding companies and the below 4 steps are for you to plan your finances.
1) Know why you are investing
An investor without investment objectives is like a traveler without a destination. ~Ralph Seger
Be very clear of the reason on why are you embarking on this investment journey. It is not good enough to say generic terms like “I want to make my money work harder for me” or “I want to be a millionaire”. Instead, but as precise as possible. Because you will face many obstacles and lose money along the way. So if you are not clear of your objectives, very likely you will lose faith and fall to the wayside. Some good investment objectives you can consider are:
1. I want to double my stock investment of INR XXX by 5 years.
2. I want to grow my retirement fund to INR XXX when I reach 50 years old.
3. I want to have a passive income of INR XXX very month by 45 years old.
This is what I considered as the most important step as you will very soon realize that there are hundreds of investing strategies out there with thousands of stocks to pick from.
Each strategy or stock will give you different results. So unless you are 100% sure of what you are looking for, you most likely will get confused and lost.
Also, make your investment goal simple and measurable. Make sure you celebrate small gains along the way.
2) Understand the Type of Investment strategies
Once you are set on your investment objectives, the next step is to explore the different stock investment strategies out there and pick the one that will be the best alignment with your objectives.
As one tries to explore the different investing strategies, beginners will be totally confused as terms like value investing, swing trading, options trading, momentum investing, etc. will be popping up everywhere. So where do you begin?
To help you navigate the investment landscape, you should ask yourself this question. How much time are you willing to spend managing your stock portfolio? Accordingly, go through the above-mentioned steps.
If you can afford greater than 6-8 hrs a week, you can look at “active” trading strategies.
An example of “active” trading strategies includes Swing Trading, Options Trading, Position Trading, momentum trading, etc. Typically, investors that pick these kinds of strategies aim to generate cash flow out of their trades to supplement their daily expenses.
Obviously, when you employ these kinds of strategies, it calls for close monitoring of the price movement and does lots of buying and selling frequently.
But if you can only afford maybe 2-4 hrs a week max, you should only consider “passive” investing strategies.
An example of “passive” investment strategies includes value investing,
Dividend investing, fundamental investment, etc. Investors who employ these kinds of strategies have a longer investment time horizon and don’t mind riding the ups and downs in the short term to get a bigger return in the longer term.
I see so many beginners going after the strategies that give them the highest possible return but didn’t really understand what it takes. This will result in a mismatch of expectations and effort required.
3) Set aside a small percentage of Investment money
If you want to try a little stock picking, set aside a small percentage of your investment money to begin with. A good guideline to follow is 10% to 15% of your portfolio or an amount that will not cause you to lose your sleep at night if you lose it all.
Why not more than that you may ask.
Well, the answer is pretty simple, stock picking has an element of risk. If you commit too much of your investment capital to it, it will affect your buy and sell judgment. Buying and selling of any stocks should be objective and never emotional.
Use the small percentage of investment money to try out the different strategies to see which one suits you most. Think of it as tuition fees to learn the rules of the trade and to strengthen your psychological defense against the ups and downs of the market.
Only when you are more comfortable with your strategy, then increase your portfolio investment value.
To start, as suggested above pick, a stock of an industry that you are familiar with. For example, if you work in the banking industry, try investing in bank stocks first.
4) Learn how to Invest
“An investment in knowledge pays the best interest.” – Benjamin Franklin
Pick up a few books to learn more about the significance of Investing. Here are some good books for beginner investors:
1. “Rich Dad, Poor Dad” by Robert Kiyosaki
2. “Think and Grow Rich” by Napoleon Hill
3. "Common Stocks Uncommon Profits and other writings" by Philip A. Fisher
4. "The Intelligent Investor" by Benjamin Graham
That's it from this blog, hope this gives you a much-needed clarity on investing. Share it with your investor friends who are starting to invest or people who are stuck in between the jungle of stocks or shares. This would be their guide.
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