Investing in the stock market is a lucrative choice since equity investments give good returns. However, before you invest in stocks, you should understand what they are, how they work and their important aspects. So, here’s a brief look at the concept of stocks and their different aspects –
In simple terms, share is the per unit capital of a company. If you buy a share, you buy a part of ownership in the company and become a shareholder. The share is tradeable on recognized stock exchanges from where you can buy and sell them. Shares are also called equity shares and they form the equity share capital of a company.
Benefits of a shareholder
When you buy equity shares of a company and become its shareholder, you can enjoy the following benefits –
The right to vote in company’s matters and form the Board of Directors
Receive dividends from the company which is the profit of the company divided among its shareholders
Capital appreciation as the value of the shares rise
Bonus shares when the profits of the company are distributed in the form of shares rather than cash dividends
The privilege of rights issue wherein you can buy additional shares at a preferential rate
Liquidity as shares can be sold easily on a stock exchange
Ownership in a listed company
Investing in a regulated manner since the share market is regulated by the SEBI
Investment in shares can be beneficial and profitable. However, before you invest, remember these three important things –
Share market investments are prone to high risks because the market is volatile. The value of shares fluctuates wildly. So, you should keep this volatility in mind.
Secondly, you need to invest through authorized stock brokers who charge a brokerage on the amount invested.
Thirdly, stock market investments should be done after you take out some time to research the performance of the stocks that you invest into. This would give you an idea of the performance of the stock and what to expect from it.
How does the stock market work?
To understand how stock markets work, the first thing which you should know is that there are two types of stock markets –
Primary market is where the stock is purchased directly from the issuer or company through IPO (Initial Public Offering) when the share is issued for the first time. Secondary market, on the other hand, is where an already issued stock is bought and sold between shareholders.
The stock exchanges of India, NSE, BSE, etc. are secondary markets. The price of the shares traded on the financial market depends on the demand and supply. If the demand is high, the price would be high and vice-versa.
Stock Exchange in India
In India, there are two stocks exchanges where stocks are bought and sold – the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE). The BSE Sensex is a free-float weighted stock market index of 30 of the most well-established companies listed on the BSE.
The Sensex, comprising of 30 of the most actively traded stocks in India, give an economic view of India. The National Stock Exchange, NSE, on the other hand, contains 7 major indices and 15 other indices.
The most popular index of NSE is the S & P CNX Nifty. Nifty 50, short for National Index Fifty, represents the free-float weighted average of 50 of the most well-established companies of India in 17 different sectors.
Investing in Stocks for Beginners
If you are starting your stock investing journey, here are some important tips to keep in mind –
Invest with a long term goal for good returns
Assess and understand your risk appetite
Control your emotions in market fluctuations
Expect realistic returns
To buy a stock, you would need a saving account linked with a trading account and a demat account. Buying and selling of shares would be done through the trading account and money for the same should be transferred to the trading account from your saving account. The bought stock would then be held in a demat account.
The terms bull market and bear market are commonly used to define the status of the share market. But do you understand what it actually means?
Bull market is that period, in months or years, during which the stock prices are either rising or are expected to rise. It applies to all types of securities being traded on the market like equities, commodities, etc. A bull market reflects positive sentiments and involves considerable volumes of share trading.
A bull market is indicated by the following indicators –
Increasing GDP of the country
Increase in share prices of companies
Employment rate rises
Bear market, on the other hand, refers to the period when the stock prices are declining or expected to decline. It might last a few months or even years. The indicators of bear market are –
Fall in share prices
Decreasing employment rate
Bear market is, therefore, a pessimistic market where share trading volumes reduce.
Risks of Stock Market Investing
Stock trading is fraught with different types of risks which affect the returns which you can earn. These risks include the following –
Type of risk
Market risk is the risk of investing in the market. It can be broken down into three types of risks –
Equity risk which the risk of varying rates of equity at different times
Interest rate risk where the interest rate of a debt instrument might fluctuate and cause a loss
Currency risk which is the risk associated with fluctuations in international currency rates
The risk of not being able to sell the investment when needed
Risk of business failure due to poor management, bad business decisions, etc.
The risk of changes in the tax regime which imposes tax on investments
The risk of inflation which would increase the production costs
The risk of change in regulations which affect a particular company
You should understand and keep these risks in mind before investing the stocks.
Though risky, stock market investments can give you attractive returns and help in wealth creation. So, understand the dynamics of the market and then invest.
For a complete guide to stock investing you can also refer to this course and build your knowledge before you invest in stocks.
The stock markets have their own version of animal farms. And just like the real jungle, each animal (read investor) has a unique and distinct approach to investing. Let us look at what the stock market farm looks like.
The lead actors of the stock markets
The two most predominant characters are – The Bulls and The Bears.
1) The Bulls
The bulls are investors who have a positive outlook about the market’s future. They believe that the stock prices will go up in the future and so will their wealth! Bulls are often responsible for driving the stock prices higher. They can be easily recognized from the crowd with their optimistic and their “bullish (go-getter) attitude.
2) The Bears
The bears have a 180-degree opposite approach to investing as compared to the bulls. They are sure that the markets are going to head south in the coming future. Bears are pessimistic and can be often found cribbing about the jungle (read market) conditions to anyone willing to listen to them.
While the bulls and the bears hog the maximum limelight in the stock market farm, there are some other (not so often spoken about) characters as well which deserve your attention.
Remember the dashing Leonardo DiCaprio in the movie The Wolf of Wall Street? As much as you like him, no one should be a wolf in the stock farm. This is because these type of investors use unethical or criminal ways to make profits. Wolves are the one who are usually responsible for market scams and frauds. We have had some wolves in the Indian stock market as well. Such as Harshad Mehta – the scamster of Dalal Street.
These investors literally “chicken out” in times of volatility. They are usually fearful of stock price fluctuations and do not prefer to assume risk. Their fear outweighs their desire to earn higher profits. Hence, they stick with conservative investment instruments such as Fixed Deposits, government securities, bonds or such other low-risk, fixed-income generating instruments.
There is a famous quote by Jim Cramer, a famous investment guru – Bulls and bears make money. But pigs get slaughtered!
Pigs are investors who feel that even a 100% return (over a one-year time period) is not lucrative enough. Such investors are always on the lookout for that “perfect” investment opportunity which will make them a millionaire in a short time period. Their investment decisions are based on market grapevine news or hot tips. They get drawn towards high-risk stocks and invest without putting in adequate time or effort in understanding the company or doing a thorough background research. As a result, they are the ones who land up bleeding most often.
Stags invest only through the IPO (Initial Public Offer) stage. Their objective is to not to remain invested for long. They want to make a quick buck by selling the stocks once they get listed in the exchange market.
Sheep investors follow the herd and invest in the “most popular” stocks. They do not have their own investment strategy. They follow a leader and do not alter their investment style with changes in market conditions.
Whenever faced with a problem, this bird instinctively buries its head in the sand, with the hope that the trouble will go away. This type of investor does the same when there is negative news about their investments. While it may be very tempting to ignore things that are unpleasant to deal with, it is not a great coping (or investment) strategy. This is because you cannot make things better when you refuse to confront them. So, this is one type of investor you should definitely not aim to be.
Just like rabbits who keep on hopping from one place to another, these investors are always on the lookout for opportunities to earn quick money. They hold their investments for an extremely short time period (usually in minutes).
These investors believe in the saying – slow and steady wins the race. They do not make any impulsive investments and trade keeping in mind the long-term. They try to minimize their number of trades and invest significant time and effort in each trade decision. As a result, they are not rattled or worried with short-term fluctuations as they are in it for the long run.
Whales are big investors who have the power to fluctuate the stock price when they trade (buy or sell) in the market. Generally, there are very few such investors. You can benefit a lot by swimming (read trading) along the whales.
There is no king in this animal farm. Simply because, markets are cyclical. For instance, although the bears and bulls are endlessly at odds, both of them get their chance to shine and make money as the cycles change. So, you can choose any investment strategy which is in sync with your risk profile (except wolves and ostrich) and you are bound to be a happy animal in the long run.
Recollect the table printed in the business section of newspapers with a lot of numbers that seemed like greek to you? Or those tickers flashing on new channels which seemed to buzz past the screen before you could even blink? They were nothing else but stock quotes and tables. (Thanks to technology, they are available online as well these days)
Stock quotes may seem intimidating at first, but once you understand the data points, you will be surprised with how simple yet effective they are.
Why you should be able to read a stock quote
You need to know the past, to understand the present. When you invest in a stock, you should have information about how its price has behaved (gone up and down) historically. After making sure that the stock qualifies on the checklist (Refer Finding Stocks for Investment), you need to decide on your investment timing as well.
Though we don’t believe that there is one “perfect” time to enter the market, investing at a time when the stock prices are reasonable and have not hit their saturation point is important. One of the most talked about financial strategies is to buy low and then sell high. Stock quotes support you to make these decisions. Even after investing in a stock, you should keep on monitoring their performance and growth on a periodic basis. Again stock quotes will come handy in such reviews.
Bottom Line: Stock quotes give you important insights about the stock’s performance. Without understanding them, you would not have complete information required to make a good buying or selling decision.
How to read stock quotes and tables?
In order to read stock quotes, you need to understand its various elements and their implications.
1) Company symbol
Stock tables have limited space that they can dedicate to each stock. Hence, in order to display maximum possible stocks, they display a symbol instead of the company’s name. For instance, Infosys limited is denoted as INFY on the stock table. Usually the stock table lists all stocks in alphabetical order (of symbols).
2) Highs and lows
Share prices keep on fluctuating throughout the course of the market working hours. The stock table mentions the two extreme points – the maximum price and minimum price that the stock traded in a particular day. The price range (difference between these two points) helps you to understand the volatility faced by the stock on a given day.
You can try to co-relate the volatility with the major events that have taken place so as to understand the impact of specific activities on that stock’s market value.
This column helps you understand the stock’s growth or trading range for a longer time period. It shows the maximum price and the minimum price at which the stock has traded in the last 52 weeks (one year).
This column mentions the last price at which the stock was traded that day. For next day trading, you can refer to this close price as a ballpark figure of what you can pay for the stock.
5) Net Change
Net change indicates the growth or degrowth in the stock’s price as compared to the previous day. It is mentioned in absolute terms as well as a percentage of change.
Net change is calculated as:
(Today’s close price less Previous day’s close price) divided by previous day’s close price
When the net change is a positive value, the stock is highlighted in green colour. On the other hand, for a negative change, it is shown in red.
Dividends play a significant role in stock selection, especially for long term investors. Hence, stock tables provide information regarding the dividend per share or dividend yield so that you can compare it against the stock price. (If the dividend field is blank, it indicates that the company is currently not making any payouts)
Dividend Yield is calculated as Dividend per share divided by Stock price. Higher is the value of dividend yield, higher is the return on your investment.
You would have come across this financial ratio in the earlier articles as well. It is one of the most commonly used data-point while assessing a stock’s true potential especially in relation to its financial performance. It indicates how much you (as an investor) are paying for every rupee earned by the company.
PE Ratio is calculated as:
Stock price divided by the EPS (Earning per share)
A high PE ratio indicates that the stock is overvalued(costly). Conversely, a low PE ratio indicates that it is undervalued.
8) Trading Volume
This shows the number of shares that were traded in a day. It is expressed in hundred. So, in order to get the actual number, you need to append “00” at the end of the mentioned number. A heavy trading volume is generally followed by a major change (up or down) in the stock price.
Stock quotes are a powerhouse of critical information, which can help transform a newbie investor into a savvy one! Read, understand, draw insights and take smart investment decisions!
Change is the only constant, especially when it comes to share prices. As an investor, it is important to understand the reason behind the changes in share prices. It will help you not only to take well-informed and correct investing decisions, but also save you from a lot of unnecessary panic or heart-burn.
What causes the share prices to go up or down?
Stock markets are known for their volatility and frequent fluctuations in share prices. So, who are the top 3 culprits behind the stock market volatility?
1) May the force be with you!
The primary reason for stock market turbulence is market forces. The duet performance of demand and supply.
Stock prices change (move north or south) whenever the demand and supply equilibrium is disturbed. When demand increases (people want to invest in a specific stock) more than the supply, it causes the share price to go up. Because, people are willing to pay a premium price for the stock. Conversely, when there is an excess supply (i.e. demand is lesser than supply), the stock prices go down. Think of it as a clearance sale for unwanted products!
Let us look at how demand and supply get impacted by company related matters.
Changes in the company’s attributes impact its stock prices. Better sales revenue, reduced cost of production or operation, debt repayment, etc. lead to higher future cash flows for the company. Investors see such companies as lucrative investment prospects.
This leads to an increase in demand and resultantly stock prices move up. On the other hand, negative factors such as change or instability in top management, product failures, increase in the manufacturing or operational costs, sharp dip in the revenue, etc. erode investor’s trust in the company. This leads to a slump in demand and stock prices come crashing down.
Our country’s economic condition plays an important role in share price volatility. For instance, factors such as change in interest rates, inflation (or deflation), political turmoil, natural calamities or pandemics (the bingo word for 2020!), financial growth (or de-growth), major changes in macroeconomic policies, currency valuation, etc. have an impact on the stock market movements.
Let us look at some examples:
Inflation eats up your purchasing power and also your investing power. Let us see how. It leads to a swell in the pricing of offerings (goods and services). As a result, people curtail their buying and spending habits. This in turn leads to a fall in company’s product and revenue and hence brings down their stock prices.
RBI makes changes to Repo rates basis the overall economic conditions. If RBI increases the repo rate, borrowing from it becomes costlier for financial institutions. As a result, they increase their lending rates which makes loans etc. expensive for businesses. This leads to a temporary halt or sluggishness in their growth activities and investors start to sell-off their stocks in anticipation of the company’s de-growth.
Massive selling leads to stock price crash. On the other hand, if RBI decreases their lending rates, it leads to a situation of credit expansion. Perceived as a sign of growth, investors flock to get a chunk of the growth and drive up the stock prices.
Globalization has been a boon for all of us. But as they say to enjoy the rainbow you need to put up with a bit of rain. Global economic conditions have an impact on our stock markets as well. Indian market has witnessed a large inflow of foreign funds and investment. If there is an economic unrest in the foreign countries or change in their country’s foreign investment policies, we may see a sudden withdrawal of such funds from us. Similarly, if foreign stock markets enter a bear phase, investors might anticipate a cascading or ripple effect in India’s stock markets as well. Market sentiments (sometimes real and sometimes unfounded) carry the potential to cause massive volatility. All such factors will lead to a crash in the share prices.
Stock markets are volatile. Period. But that volatility is overwhelming only when you do not know how to interpret the cause of the turbulence. If you invest in a disciplined manner, you can capitalize on the volatility and optimize your returns.
All you need is solid understanding of the market workings, good stock selection and a robust (yet flexible) investment strategy. As a wise person once said, for the investor who knows what he (or she) is doing, volatility creates endless opportunities.
Here a complete course on Stock Market for FREE, Learn and Start Investing Today!
You are now familiar with the various stock valuation methodologies and can identify the over-valued or under-valued stocks with precision. But the next step is how do you go about investing in stocks in India.< Now before we can answer this question, it is important to talk about the two approaches to stock investments.
Types of Investing
Wealth appreciation is the shared goal for all investors. However, the routes to this common destination may vary. Broadly speaking, there are two ways of investing – trading and value investing.
Trading is about frequent stock transactions (buying or selling) over a short period of time. The objective is to earn quick returns with a focus on stock prices. Investors who adopt this approach (also referred to as traders) jump into and out of investments within a short span of time (sometimes within minutes) with the goal of short-term profits. They often focus more on the stock’s technical features instead of the company’s fundamentals or long-run prospects. They are only concerned with the direction of movement. For individual investors, trading can be extremely dangerous due to the excessive volatility associated with the stock markets. You need to have a clear investment strategy, be proficient with technical analysis to predict the future price movement and fast enough to take decisions (buy or sell).
This brings us to the second type of investing – Value Investing. This concept was popularized for the masses by none other than Mr. Warren Buffett. He is not a believer in the concept of short-term profits. In fact, he is of the opinion that if you are not ready to own a stock for ten years, you should not bother owing it for even ten minutes! Value investing is a long-term investing technique. Value investors identify stocks whose intrinsic value is significantly higher than their current market value and invest in them. The rationale being that in the long run, the market will correct its inefficiencies and the stock will get valued at the correct level. So, basically buy low, hold the stock and sell high. The biggest advantage of this methodology is that you remain unfazed by the regular stock market fluctuations and benefit from the power of compounding! No wonder, Mr Buffett could grow his empire from a mere 6000 USD to 7320 Crore USD in less than seven decades.
Moral of the story – it is better to stick for the long run. Treat it as a test match rather than as T-20 match.
There are 5 important terms which you should be familiar with before you invest in stocks in India.
It refers to an entity which holds our financial investments in an electronic or dematerialized form. Depositories take the responsibility of maintaining ownership or transaction related records of all the investors. In India, there are two depositories – NSDL (National Securities Depository Limited) and CDSL (Central Depository Services Limited).
2) Depository Participants
Depository Participants or DPs are the intermediaries who facilitate the transactions between you (the investors) and the depositary. They charge brokerage for their services.
3) Demat Account
This account holds all your stocks in dematerialized form. In simple terms, it helps to convert paper or physical forms into an electronic one. You need to have a Demat account to participate in the stock market. Think of this account as you bank passbook. It will have details of all your transactions albeit in the stock world.
If you want to open a Demat account, you will need to reach out to a registered DP and complete the formalities (application form, identity proof, address proof, etc.)
4) Trading Account
Your trading orders need to be initiated through the trading account. You can reach to any registered broker (or entity) for completing the formalities associated with this account. The supporting documents required for a trading account are similar to that of a Demat account. Once you open a trading account, you get a unique trading ID which can be used for all trading (buy as well as sell) related transactions.
5) UIN (Unique Identification Number)
Want to live life king size? Then get a UIN. If the value of a single trade exceeds Rs. One lakh, then you would need a Unique Identification Number.
It is important to note that PAN (Permanent Account Number) is a mandatory document for stock trading (or rather, any financial investment in India).
Now that you are well-equipped with the necessary information and have completed all the pre-requisites, how do you actually trade? It is quite simple. All you need to do is to inform your broker or intermediary about the stocks that you want to invest in and the quantity. You can either inform them on the phone or place in your request online on their portals.
Some things to keep in mind while placing the orders with your broker:
Leverage technology (emails, SMS, etc.) to get timely updates about trade confirmation.
Clarity about the stock exchange
You should always clarify which exchange (NSE or BSE) would you like to trade on. Usually, there is a marginal difference in the stock prices.
Risk disclosure documents
Read these documents thoroughly and get an in-depth understanding of the contents. It generally forms part of the registration formalities with the brokers.
Once the broker places the order, the monetary part of the trade (cash inflow or outflow) takes place through the trading account. The Demat account gets updated with the transaction details. And voila, just like that you have complete your first stock market trade!
The “how” to invest in stocks in India is fairly simple. It is the “why” and the “when” decisions that are more complex. However, it is safe to say that if you have a clear vision of what you want to achieve in the long run and are through with the basics, you will have a comfortable journey.
It is often said that the secret behind a happy marriage is finding the right partner. The same rationale applies to your stock market investments as well. If you find the right stocks your portfolio and wealth is bound to flourish in the long run. But how do you go about finding the right stocks? Should you simply go for the trending stocks or replicate your colleague’s or friend’s stock picks?
Does not matter if you are driving a hatchback or a luxury sedan, if the wheels of the car do not have enough air, you are not going to go far enough. Similarly, in stock investments, irrespective of valuation, market rumours, star ratings, etc. if the company under consideration is not fundamentally strong, your stock investment is not going to bear fruits. But how do you check the fundamental strength of a company? You go with numbers. Financial ratios help you analyze a company from a 360-degree perspective. They cover a wide range of aspects ranging from stability, operational efficiency, profitability, liquidity, etc. They let you add meaning to raw financial numbers.
Here are the top seven financial ratios that would help you decide whether the company in question deserves your time and hard-earned money.
Earnings Per Share or EPS
Debt to Equity Ratio
Return on Equity or ROE
Price to Earnings Ratio (P/E)
Price to Book Ratio (P/B)
Price to Sales Ratio (P/S)
These financial ratios are like the written entrance examination you have to clear before you qualify for your interview round! Once you find that the company has performed well on the above parameters, it is time to move to the other parameters.
You might be wondering, if a company is fundamentally strong, is that not a good enough reason to invest in it. Why bother with additional steps or efforts. While the question is valid, the limitation of many financial ratios is that they are a lag indicator. They tell you how the company has done in the past and not much about its future prospects. Hence, it is important to look at other factors to make sure you choose the right stocks.
2)Your understanding of the company
Do you understand the company? Its products or services, business model, competitors, market standing, etc? In order to ascertain the future prospects or growth plans of any company, you need to understand it in great depth. For instance, does the company have an offering which will be required even after two decades? For example, if someone had invested in a typewriter company’s stocks decades back, where would he or she stand now. The product has a limited shelf life and is no longer in use. However, if you take the example of a product like soap, it is going to be in use forever. There may be new versions, but the basic product will continue to exist.
Hence, it is important to choose a company that you understand and whose offerings have a long lifespan. Stocks of such companies have the potential for superior growth (thanks to the strength of compounding)
3) Look for the “moat”
If you have visited any fort or castle, you would have noticed a deep and wide ditch around it (earlier filled with water or ferocious reptiles). The purpose of the moat was to act a defence in times of attaching and protect the kingdom. When you look for companies to invest in, you need to look for a similar moat. This economic moat arises from a company’s distinct advantage over its competitors. It helps the business to be sustainable as well as earn higher profits. So, go for a company with a wider economic moat around it.
4) Depth of debt
Remember when Bee Gees crooned How deep is your love! You need to ask how deep is the debt of the company. Debt financing is a great way to generate funds but if not kept within limits, it is as dangerous as a ticking time bomb. It is extremely important to look at the company’s financial statements such as balance sheet. Companies with huge debt as they can be a risky proposition. Remember, in the event of the company winding up or becoming bankrupt, creditors will get priority to recoup their money.
Pro Tip: Debt can be worded differently in different sectors. For instance, check for NPAs (Non-Performing Assets) in the financial statement of Banks or NBFCs.
5) Captain(s) of the ship
You could have the best product/service, strong fundamentals and a great Unique Selling Proposition. But if you do not have the right people at the help of the company, all the good things will come crashing down. It is crucial to analyze the company’s management and the core team.
Get answers to these questions:
i) What is the strategy of the company?
You should know where is the company headed and what are its goals. The vision, mission, value statements and Employee Value Proposition would give you a fair idea about this aspect.
ii) How stable is the management team
A long and steady tenure is often considered as an indicator of a healthy and robust company.
iii) Promoters and share buybacks
Promoters possess the deepest knowledge of the company. If you find them giving up their shares, it is a red flag. You should dig deep as it may be a signal that the promoters do not have trust in the stock’s potential to grow. Though that may not be the reason always. They may need funds to start another venture! The idea is to ask tough questions, get the answers and make well-informed decisions.
Again financial ratios come to your rescue. Look at Return on capital employed (ROCE) in addition to ROE (Return on equity) to determine how efficiently are the investments being translated into revenues and profits.
v) Qualitative aspects
Transparency, honesty and integrity may not be quantified but play a significant role in strengthening the management of the company. You can assess these factors by looking at how the core team has handled tough market conditions, bad results or economic sluggishness.
When you consider all these factors (in unison), you will end up with a great stock. Add the concept of valuation that we discussed earlier and you cannot go wrong with your stock investments. Remember though, all that shines is not always gold. Just because a stock is cheap does not make it a good investment opportunity. Its intrinsic worth should be the determining factor.
Finding the right stocks can be a cumbersome or tiring process. But the result of that hard-word is extremely sweet.