One query that was posted on our website read, ‘Hi, I have investments in equity mutual funds and Index funds via SIPs. I have become adept at picking out good mutual fund schemes, but now I wish to graduate a bit further and start building a direct stock portfolio. I understand markets somewhat but am unsure how and where to begin my stock journey. I don’t wish to pick stocks based on some random tips or recommendations, but get invested in the process and learn. Please guide.’
Indian Stock markets have rallied in the last four years, and how. The market shrugged off an unexpected election outcome and continued on its upward trajectory.
The market has added $2 trillion in capitalisation in the last four years, which means the total value of all the stocks listed has increased by $2 trillion, or about 1.7 lac crores.
In 2011, 2% of households were direct equity investors, which has increased to 17%. Of all equity investments, retail investors directly hold about 9% and via mutual funds 8%, whereas foreign portfolio investors hold close to 18%.
Earlier FPIs used to drive the market, but not anymore. The retail investor is a force to reckon with.
No wonder everyone wants to join the bandwagon of investing in stocks. Let’s try to unpack the process a bit without going into whether the market is too high or not to invest.
Successful stock picking is an unbelievably complex task, as infinite factors can affect stock prices.
Nonetheless, we can attempt to unpack it with as little jargon as possible.
What are Stocks or Shares?
Stocks are partial ownership in a business. Even if you hold one share of a company, you share in its profits or losses and are entitled to its dividend.
What should I look for when considering buying a particular share?
First of all, you need to make sure it is a profit-making company. Only very savvy investors should look at loss-making ones.
Look at the industry the company is in. Say you are considering buying Hindustan Lever, which is now known as HUL. It is a fast-moving consumer goods company. You may be using many of its products, as it owns more than 50+ brands: Surf Excel, Dove, Bru Coffee, Lifebuoy soap, Brooke Bond tea, Kissan tomato ketchup, etc. You must have used many of them in your day-to-day lives.
These are consumer staples companies, slow and steady, and don’t get very highly impacted by destructive economic cycles. They have survived decades of upcycles and downcycles and lived to tell a tale.
On the other hand, a company like FSN e-commerce or Nykaa is an exciting new-age company that will grow very fast. It can turn fabulous profits or crash and burn.
You can also look at Maruti Suzuki, whose cars we all know and use. The economic conditions of the country and market are a huge factor in a company’s prospects. If people become more prosperous, they will not consume more soaps, but they may buy more luxury beauty items from Nykaa or buy higher-end cars.
What Next?
Once you have identified the company, you can examine its financials. The company website provides a lot of information, including notes from management and auditors. It will also list the risk factors the business is facing.
You can look for news about the company on news wires and set a Google alert for it. You can also look for news in our humble newspaper.
Another idea is to use ChatGPT to summarise the company’s business and how it makes money.
If the business model is something you don’t understand, skip the company. There are plenty of companies to choose from.
How do I know if the stock price quoted on the exchange is right?
We feel you. You will never know if the price of the share you wish to buy is fair or entirely right. It is just impossible to know that. The price is a function of the number of buyers or sellers in the market for that particular stock. Buyers can buy for any number of crazy reasons, like a broker tip or price momentum, and so can sellers sell for whatever their mood states. Sentiment for individual stocks keeps changing like a teenager’s mood swings.
Price movements are out of your control; all you can do is determine whether the price you are paying is value for money.
Valuation
One simple tool is the price-to-earnings ratio (P/E multiple). This ratio tells us the price of a share relative to the company’s profit. The higher the PE, the more willing the investor is to pay for future earnings.
You can learn how to calculate the PE ratio here.
One shouldn’t look at the PE in isolation. You look at its history, the industry’s valuation, and the PE of its peers and make an educated guess.
Typically, a higher PE ratio is viewed negatively, but sometimes, it can also mean that the market is very excited about the company’s growth prospects and expects it to make a truckload full profit.
It takes some time and experience to judge what a high valuation is and what is not. A low PE may feel like a bargain, but the company may be losing market share, or its cost of production may be going up, and profit is expected to fall.
Several other ratios can be used. Experienced investors or fund managers use screeners and software to compare financials.
For beginners, I have a hack. You can pick large-cap companies from BSE Sensex stocks or Nifty 50 and study the price movements, financial ratios, and PE multiple. Pick out a couple of them from an industry you feel is growing track for some time and invest small sums in them.
NSE India and BSE India offer several resources and courses. You can take them, and if you invest in large-cap stocks and can hold them for a long time, the margin of safety is higher.
Broker & Demat A/c
You can choose a no-commission online broker like Zerodha, Groww, or Upstoxx, mainly executors, or old-school brokers who charge commission but provide you with some research and handholding.
Most people use both types of brokers. You can typically open a demat account with a bank, or most brokers provide that service.
Fund your brokerage account and press buy and go.
Go slow and steady.
My personal view currently is that retailers have become a bit reckless. A new generation of investors has not seen a down market and has unshakeable faith that markets will go only up. One needs to remember that the price of stocks should go up only if earnings increase. If earnings disappoint, then the market will correct.
There is a lot to learn and digest.
As long as you take measured investment calls, you won’t have a dull day as a stock investor.
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