Sunday, April 15, 2012

Investing in stocks 101

There are many who have decided that they want to jump into investing in the stock market. They might have even opened a demat account and a trading account and now they want to invest. So here is a basic guide to understand a way to start investing in the stock market. The underlying assumption is that you already know what is a stock and that you are participating in the equity of a company.
This is written with an orientation of an Indian investor (with respect to Indian websites/companies/indices, etc.)
1. Know how to choose a trading and demat account. For more details, read http://ajitjagan.blogspot.in/2011/01/choosing-demat-and-trading-account.html
2. Decide what is your investable surplus every month/every six months. This should be the amount you will not have to touch and will be invested for the long term.
3. Allocate this money between debt (PPF, fixed deposits, bonds, NSCs, etc), equity, gold, property, etc. The idea is that you can have more equity exposure if you are young and that if you are ready for the highest of the risks for highest of the returns.
4. Out of the surplus funds allocated for equity investments, you have two options: indirect investing using mutual funds or direct investment in the stock market.
5. There are broadly two schools of investing in the stock market: Technical analysis and Fundamental analysis and rarely a combination of the two
6. The stocks can further be classified under the fundamental analysis as Growth stocks or value stocks. Some stocks are also invested for some special situations (chances of a delisting, chances of a hostile takeover, policy changes favouring the company, special dividend, bonus stocks, stock splits, buyback of shares, etc.)
7. Now the most important question is "how to you know which stock is good or not to buy? where to get information"? One of the most popular websites in India for financial information is www.moneycontrol.com. For each stock, there is a separate page giving much information about the stock. From the stock prices across the two of the most liquid stock exchanges to volume traded, to financials (standalone/consolidated), news, research reports, comparison between stocks, etc. Be careful about the PE ratio reported on this website as the website takes the standalone earnings per share for the denominator and gets the value wrong in case the company has subsidiaries and has a consolidated financial. Calculate PE on your own. Go through the website's every link to understand many aspects of investing. To know more on the technical terms and what they mean in simple terms, check http://www.investopedia.com/dictionary/#axzz1s7mae7Rt. Do read a lot to understand various strategies, methods, techniques, views, opinions before trying to make your own opinion about the stock/market.
8. Create yourself a free account and put the stocks you are interested in, in the watchlist. You can even keep track of your investments by creating a portfolio.
9. I suggest instead of putting your money into the stock market immediately, I would ask you to spend a month or two choosing 3 stocks to invest in and finally 5 stocks in 3 months to invest in. Imagine you have put in the money when you were interested and put it in the portfolio. Track it as per your desire. Initial investors usually tend to be very anxious about every 1% move up or down. Spend the first three months to get used to the volatility. I hope at the end of the three months, you would have a mixed result. A few of the 5 stocks doing better than the buy price and a few worse than the buy price. Try and analyse what went right and what went wrong in the stocks. I hope you dont get most of the investments right in the first chance as that would make anyone a self-claimed expert and bring arrogance that is sure to ruin the big bets you would most likely place in the next level if you made a lot of right notional calls.
10. Give time and thought to the sector allocation, capitalisation allocation(large cap/mid-cap/small-cap),  minimum investment in a stock (based on your risk apetite and a way to minimise your demat/brokerage charges to make your transactions efficient).
11. Remember one simple rule to make money: "Buy Low, Sell High". This rule looks obvious enough, though its importance can't be emphasised enough. Remember that a stock is never that important as its price. People tend to buy stocks because it is a good popular stock without consideration of its valuation, its future growth prospects, the risks of the company/sector (and at usually high prices and then wonder why they didnt make money).
12. Be careful of what people say/recommend. Is there an ulterior motive for them to recommend something? Don't always trust the "experts". Many a times, your on the ground insights maybe more useful than their expert not knowing much. Listen to experts who talk to you about their wrong calls and their losses. You get to learn from other's losses more than other's successes. Be wary of people who advertise their successes and not their losses.

And All the best! :)

2 comments:

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