There are many high-end investors who beat the Nifty generating returns in the range of 35% to 60%. They made huge profits from their years of experience in the stock markets. They must have generated low returns or they may have lost money on stocks.
In my early investing days, I didn't make any profit because I was investing in stocks after listening to stock advice from brokerages (and so-called TV channel experts).
It is your business. Everyone from a brokerage house to financial websites to TV channel experts would have you believe that investing in stocks is as complex as rocket science. After all, if you know how to select stocks on your own, then how are you going to make money.
Bullish India Stock Exchange
But what if I told you that there is an easy and simple way to identify some great stocks?
Disclaimer: I do not recommend any particular action. The names of the actions mentioned in this article are purely to show how to do the analysis. Make your own decision before investing.
You profit from the stock market with your own analysis ...
… And in this article, I'm going to walk you through a step-by-step approach to selecting great stocks and how to invest in the Indian stock market in 2020.
7 Steps to Investing in the Stock Market in India for Beginners
Let's look at a step-by-step guide on how to invest in the stock market in India.
Selecting and Filtering the Right Actions Using Financials
Select only companies that you understand
Look for companies with a sustainable pit (competitive advantage)
Find companies with low levels of debt
Use financial ratios RoE and RoCE to identify suitable stocks
Honest, transparent and competent management
Finding the right price to buy the shares
You can learn about investing in stocks with as little as Rs 10.000 of investment.
Learn the approach and apply it with an investment of 10.000, if you make 5000 profit in the first year then the same approach can be applied with an investment of Rs 10.00.000. to get 5.00.000 Rs. earnings in the future.
Learning is more important than winning
Disclaimer: The actions mentioned in the article are not a recommendation to buy or sell. We take them as an example. Invest in stocks after your own diligence.
They can follow my approach even with minimal or no knowledge of financial statements. Trust me, you can find great stocks with little intelligence and basic business knowledge.
Types of investment
Before I explain my step-by-step approach to stock selection, let's first understand the two different methods of profiting in the markets and which of the two methods is practiced by most of the top investors around the world to create wealth. for themselves.
Stores
Value investment
You are wrong if you think that trading and value investing are the same thing.
Trading is focused on making frequent profits in a shorter time frame, regardless of bull or bear markets.
During bull markets, trading involves buying at a lower price and selling at a higher price in a short period of time. In falling markets, they make a profit by selling higher and buying lower, also known as short.
Since the trading style involves entering and exiting in a shorter period of time, the retention period for shares is no more than a few minutes or only a day or in some cases a maximum of a few days.
People who practice the trading style make use of tools such as technical analysis that uses complex indicators such as moving averages, the stochastic oscillator to forecast the future movement of the stock price.
Below is a screenshot showing technical analysis charts to predict the price movements of Axis bank shares.
Trading can be dangerous (big losses) due to the huge volatility of share prices. If you do not have a clear strategy and you are not fast enough, you can end up with big losses, wiping out all the money. If you are interested in trading then you can learn how to do intraday stock trading in India.
The market is full of such examples of men who lost money by allowing themselves to trade.
I tried trading a few years ago, I made a profit of Rs 10.000 on the first day and ended up losing over 100.000 in the following days. I knew that trading is not my specialty.
I focused on my strengths, that is, researching stocks and holding them for a long period.
Value investment
Warren Buffett says, "If you don't think about owning a stock for 10 years, don't even think about owning it for 10 minutes." According to him, you should invest in companies that you can keep forever.
The biggest advantage investors gain from holding stocks for such long periods is the dividend advantage, stock splits, and most importantly the drastic rise in stock price levels as the underlying business (of those stocks) grows profitably over the years.
These stocks are called "multi-bags" because of the multiple returns they generate for value investing professionals. The other advantage that value investing offers over trading is that one can cope with fluctuations in the stock price caused by external events or by downtrends in business with the belief that the stock price will fall. it will recover over time and reward investors with attractive returns.
Warren Buffet, the legendary value investor that every investor seeks to create wealth for himself by investing in good stocks and holding them for a long period of time. What you see in that picture is the power of composition at play, which is at the core of value investing. When you hold stocks for long periods of time, it results in exponential growth that creates enormous wealth.
People who practice value investing use fundamental analysis to draw conclusions about investing in a stock. In fundamental analysis, daily price fluctuations are ignored, but instead focuses on studying the company's underlying business, the industry in which it operates, its finances, the quality of management, and more.
Whereas people who practice trading aim to get a quick 10% to 20% return on one stock and then sell it to move on to another. In this way you can make profits but never create wealth. Fortunes are made by investing in the right stocks and holding them until you make a fortune.
Income tax benefits
With trading, you end up paying 15% short-term capital gain tax on every profit transaction you make since your holding period for the shares is definitely less than 1 year.
Whereas, with value investing, your capital gain tax is 10%, regardless of whether your profit is Rs 100 crore or Rs 100 when you have the shares for more than one year.
"To make money from stocks you must have the vision to see them, the courage to buy them, and the patience to hold them." There are literally thousands of companies listed on the BSE (Sensex) and NSE (Nifty). Unless you are armed with an approach that you can use to filter, you will be lost in the sea of companies.
The investment approach that I am going to share with you is the one that I personally practice to filter stocks before investing in them.
Value investing is an ocean unto itself, and its practitioners go through a tedious process of analyzing stocks by reading financial statements, annual reports, and other miscellaneous information pertaining to a company's financial health before investing.
But, based on what I have learned over the years, I have taken the following simple and practical steps that are used to get started on the path of stock selection even without having deep financial knowledge. Therefore, for your initial consideration, you can use the following easy-to-implement selection criteria to filter out those actions whose fundamentals seem strong.
Selection criteria
For example, with the help of Equitymaster's free stock appraisal tool, I applied the above selection criteria to filter out some of the stocks for my initial consideration.
You can then check the other financial key figures as part of the selection criteria by clicking on the company's data sheet. To learn more about the parameters that I have used in the selection criteria to filter stocks, you can refer to this article on financial ratios.
Step 2. Select only companies that you understand
Now that based on Step 1 you've filtered the fundamentally sound stocks from the rest of the junk, learn more about these stocks by reading about the underlying company as much as you can.
You can do this by visiting the company's website, following updates on media platforms, Googling the company, and getting feedback from your fellow investors. Learning more about the company will help you understand the company's business and provide you with answers to three key questions.
Is the company's business simple?
Do I understand the product / service?
Do I understand how the business works and how money is made?
It is important that you invest in companies that you understand, at least in the initial stage when you are learning to invest in stocks. That way you will make sure you don't lose money.
For example, of the stocks we filtered out in step 1, I would have looked at tech stocks like Tech Mahindra, Vakrangee, and Mindtree Ltd. to begin with.
That's because, I have significant work experience in the information technology sector and I am also passionate about technology, which makes it easy for me to understand these businesses, the reasons for their growth, and predict how the future might turn out.
Similarly, my cousin comes from a pharmaceutical background and therefore it would be easy for him to understand the actions of that sector. There could be many businesses that don't require any training to understand them at all - think consumer products like footwear, shaving cream, cars, etc.
For example, on your filtered list of stocks is a two-wheeler manufacturing company. It is not necessary to have knowledge of the two-wheeler industry to know that the two-wheeler sector has always shown growth in India due to increased demand and better road connectivity.
Similarly, when the real estate sector was growing in India, companies that manufacture tiles (Kajaria), sanitary ware (Cera) and other similar support companies were accessible. The business model of the company had to be simple and the company had to excite him. Finally, if you don't find any stocks (companies) that you can understand immediately, take the time to study the company and its industry.
Step 3. Find companies with a sustainable pit (competitive advantage)
It is not enough to identify companies that have passed the financial numbers test and whose business models are easy to understand.
In business terminology, Pit is the competitive advantage that one company has over the other within the same industry. The wider the moat, the greater the company's competitive advantage and the more sustainable the company becomes.
Which means that it would be very difficult for competitors to displace that company and capture its market share. Now, that is a stock (company) that you would want to select and invest in. Examples of this moat can be brand power, intellectual property rights and patents, network effects, government regulations that control barriers to entry, and many more.
For example - Apple has a strong brand name, pricing power, patents, and huge market demand that give it a wide moat that acts as barriers against other companies.
It's no wonder that Apple is close to becoming a trillion-dollar company and has generated huge profits year after year, turning out huge returns for its investors. Another simple example of brands with strong moats is Maruti, Colgate, Fevicol that have great memory value in public memory.
Given their huge distribution network in many states and the government's digitization push, it would be very difficult for a new competitor to displace them from the market.
Not surprisingly, the stock price soared from Rs 16 in 2010 to over Rs 500 in 2017. (Note: Current prices may go up and down based on short-term pain in the markets)
Therefore, look for and identify such companies with strong moats in the early days.
Step 4. Find low levels of debt
Large levels of debt pose a significant risk to the company. A couple of selection criteria we used to filter stocks were the debt / equity ratio and the current ratio.
These two ratios are indicators of how much dependence the company has on borrowed capital (debt) to finance its growth and whether the company will be able to meet its short-term capital obligations.
Therefore, when stocks are selected, apart from these ratios, it should be checked how the company has managed its debt in recent years. The company that is reducing its debt will automatically increase its profits, which is a positive sign for the financial health of the company.
Simple tips to check financial health:
One way to do this is to review the company's balance sheet where the company's current liabilities and long-term debt are listed. In general, long-term debt is debt that matures after a 12-month period. And current liabilities include the company's debt that must be paid within the year.
Businesses with too much long-term debt will find it difficult to pay off these debts, as most of their capital goes to paying interest, making it difficult to use the money for other purposes. This poses a sustainability risk and can lead to the bankruptcy of the company. They can follow my approach even with minimal or no knowledge of financial statements. Trust me, you can find great stocks with little intelligence and basic business knowledge. A couple of selection criteria we used to filter stocks were the debt / equity ratio and the current ratio.