If your plan is to start investing in the stock market then this article is for you. This is my first article on how to invest in the stock market.
The main aim of any investor is to find a good quality of business to invest in. and this is the only goal of any investor.
To reach that point where you can start finding a good quality stock on your own, you first need to know the basics of the stock market.
Considering you know nothing about the stock market I am writing this article. If you know about the stock market you can also read this article.
Stock market investing
1. The basics
The stock market is the place where stocks of different companies are traded. Any company which is listed on the stock market you can buy their shares.
There are two main exchange in India
1. NSE (National stock exchange)
2. BSE (Bombay stock exchange)
Exchange is the place where stock is listed. You can buy shares from any of these exchanges.
Nifty and Sensex are indices of NSE and BSE respectively.
Indices only represent how the market is performing as a whole.
Nifty consists of 50 stocks of different sectors and Sensex consist of 30 stocks. The companies which are listed on nifty and Sensex are the leaders of their respective industries.
The list is always updated according to their performance.
The whole process of the stock market is regulated by SEBI (Security and Exchange Board of India).
After knowing the basics of the stock market, the next step is to open a trading and Demat account. This is also called a brokerage account.
2. Open trading and Demat account
In this section you will know:
What is the trading and Demat account?
Where to open trading and Demat account?
The trading account is those accounts where you can buy and sells your shares. And Demat account is like your savings account. In saving account you keep your money. Similarly, in the Demat account, you keep your shares.
There are many online brokers through which you can open your Demat and Trading account.
You can also open a brokerage in your bank.
But the drawback with the bank is that it is expensive than an online broker. The brokerage charge is also more with the banks.
You can open your brokerage account with an online broker with a minimum charge. Brokerage is also very less with an online broker.
Some of the best online broker to start investing in the stock market in India is:-
4. Angle broking
6. Motilal Oswal
Every broker will provide you their platform where you can buy and sell your stocks.
Now you know where you can buy your shares. The next step is to know what person you want to be in the stock market.
3. Different types of investor in the stock market
There are two types of investor in the stock market
Traders are those who trade, which means they buy and sell stocks on a frequent basis. They try to make a profit by market fluctuations.
The investor is those who invest, means they buy and hold shares for a long period of time. They do fundamental research before buying any stocks.
It’s all your choice who you want to become.
Trading is speculations and I never recommend that.
Now you learn about types of investing. The next step is to pick a stock. This is the most important step.
4 . Pick a stock
Picking stocks is finding a good business. Stock picking is an art. You can learn it.
What do you think about which types of business you should invest in?
Of course, you would say good business which can make a profit.
In the stock market, there are nearly 5000 stocks. It is our business to find a few good quality stocks to invest in.
These are the few things you should consider before buying any stocks
i. Look for the Businesses you understand
There are many different types of businesses out there. It is possible that you do not understand every type of business. So stick around your area of competence.
Warren buffet says it” define your circle of competence”.
It is perfectly normal that if you don’t understand the economics of business how it is possible that you are going to make money from this stock.
So the first important step is to find the business you understand.
Look around yourself, you are surrounded by different types of wonderful products you use on a daily basis. If you analyze properly it is possible that you will be able to find a few good businesses.
ii. Look for a business with low debt
Avoid the company with large amounts of debt.
The best tool we have to measure the risk is the debt-to-equity(D/E) ratio. This ratio is really easy to understand.
Look for the company which has a debt-to-equity ratio below 0.5.
Debt-to equity = total debt/ shareholder’s equity
This is the best parameter to discuss risks associated with the business.
You can find this ratio on the money control website.
iii. Look for a business with a high return on equity
This is the most important key ratio we should look for.
ROE simply tells us how much the company able to grow the owner’s money during the year.
This is the profitability ratio. It lets you understand how much profit the company is making on your money.
You should look for this number as high as possible.
iv. Look for honest and able management
Management integrity is very important. If the management of the company is good than it is very much possible that the company is going to perform well in the future.
To find the management integrity you should look for
Promotor holdings determine how much promotor has faith in his own company. If promotor holdings are high then it gives a good sign to the investor.
You should look for the company which has high promotor holdings.
Pledging of shares
Promotors raise funds by keeping their shares as collateral. High pledging of shares is always dangerous for retail investors.
It can cause sudden crash in stock price.
5. Look for competitive advantage(moat)
Moat is something that makes the company better than its competitor. Every good company has something unique that makes him better than others. Your job is to find something in every company.
Moat can be anything like:-
1 A strong brand identity. Like tata salt, Patanjali.
2 A monopoly on the market.
3 A unique brand name
4 Economics of scale or the ability to supply huge amounts of goods or services cheaply.
5. Portfolio Allocation
Portfolio allocation means how much money you allocate for which stocks.
Once you have selected your stocks to invest. The problem is how much you should invest in which stocks.
The answer is up to you.
When you have a little amount of money than this is not very much relevant to you. It is more relevant to the institutional investor, they are managing lots of money.
They consider many factors while allocation their fund.
You don’t need to be professional investor to invest in the stock market. One thing you need is an eagerness to learn. Because investing requires lots and lots of reading.
Take help from this article to start your investment.
If you have some query you can contact me or just leave the comment below in the comment box.