How to start investing in share market.

There are a lot of big investors in the world who have made big returns from stock markets indices such as Nifty, Sensex, Dow jones, Nasdaq etc. These people have made big returns because of their many years of experience in stock market.

You too may have made a very less returns or lost all your money in Stork Market.

When I started investing in the stock market, I started intraday trading without learning anything, in which I made a lot of profit in the first few days, then after that when I add amount amount in my investment slowly, then I started getting hurt after the loss, I did more intraday trading to compensate for my loss - which led to my overall loss at last.

Then I gave up trading for some time and started investing in the stock market only after learning everything.

After I lost in the stock market, I learned that I would never listen to any expert's advice, tips given on television, etc. for investment in shares. Start learning first in the share market then after that only we should start investing in stocks.

It is the job of all the news channels and financial experts to promote companies through their TV channel or on the website or on any other medium, so that the business of these people continue to operate.

All these experts will always tell you through their TV channels and other medium that stock market investment is very difficult and you should learn saving money instead of losing money in stock market. The risk in this is very high and less than 1% of the investor are able to succeed in this.

If you also get to know that how to choose good shares, what price should be good to buy any share and when should it be bought or sold, then you too can become a successful investor.

But if I can tell you very easy and simple way to choose good shares, then how will it be.

If you do all after studying, then you too can earn money from the stock market after doing your own analysis.

In this article I will tell you step by step approach that how to choose good shares.


Let's know how 

1. Choosing Good Shares - After Fundamental and Technical Analysis.

2. Choose only those companies that you know and understand.

3. Choose only those companies which have good earnings, are stable and have no competition means choose market leaders.

4. Choose only those companies which do not have any loan or the loan should be too low.

5. To choose the right share, definitely look at ROE (return on equity) and ROCE (Return on capital employed).

6. The company should have competent management, honesty and transparency.

7. Buy shares at their right prices.


You can learn stock market investment by investing very little amount.

First of all, you have to open a demat account, if you do not have a demat account. You can open a demat account from any good broker. If you ask me, I like zerodha the best and you can open Zerodha account from the link given below.


You should learn first and invest ten thousand rupees in the beginning. If you earn five thousand rupees in the first year, then in the next year you can make the investment a little bigger and earn the money again by applying the same strategy.

"Learning in the share market is more important than earning in the when you begin your investment journey"

You just understand my way of investing and earn money without any big stock market knowledge.

Trust me, you can choose a good stock based on a little smartness and basic knowledge of investment.

Types of Investments - First Trading and Second Value Investing

Before explaining what is the whole process of choosing good shares, let me first tell you about these two types of investments. Using these two types of investments, big investors of the world earn money.


1. Trading (means intraday trading and short term or medium term trading)

2. Value Investing (Investing for Long term)


If you think that both trading and value investing work in the same way, then you are wrong.

Trading is done again and again in a very short time to earn profit quickly and it works in both the falling and the rising market.

In trading, When the stock market rises, we buy at a lower price and sell at a higher price in a very short period of time.

And when the stock market falls, then in trading, we sell first and later buy at a lower price, that too in a very short time.

So in this way we earn profits by investing for very short time and that time can be of few minutes, one day or few days. In this we can also make profit in the falling market and the process of making profit from trading in this falling market is called shortening. 

Investors use many tools to practice trading called technical analysis and these are tools like moving average, MACD, RSI, price movement indicator, volume etc. Using all these tools, investor predicts in which direction the stock will go.

You can see all these indicators in the interface of your demat account.

This is very dangerous because of the fluctuations in the stock market and there is high possibility of very big losses.

If you do not have the right trading strategy and you are not very fast and smart, then you may be at a huge disadvantage and may also lose all your money. 

The stock market is full of examples in which many people have lost all their money.

As I mentioned earlier that I had started invested in trading ten years ago and in which I had lost 50000 rupees. At that time I was got to know that Trading is not for me.

After that I focused all my attention on researching good shares and stay invested in those shares for a long time and in which I also got success.

Let me now tell you about the art of value investing.

Warren Buffett says that "If you don't buy a stock for 10 years, don't buy it for 10 min."

According to Warren Buffett, you should choose companies in which you can stay invested forever.

The biggest advantage of being invested in a stock for a long time is that you get a dividend from time to time, your stock will also split which increases your share count and the biggest advantage is that your stock goes up dramatically in future and reason for that will always be the success of the business of the company.

Such shares later become multibagger due to their manifold returns and value investing makes money to investors.

Another advantage of value investing is that, In the fluctuations of the stock market and in the ups and downs of the business of the company, we believe that one day the business of the company will become very good and in the long run this stock will make us good profit.


See the power of investment in the photo given above or you can also call it the power of compounding, which is made by value investing. When you hold the shares for a long time and you do not sell them, then these shares will make for you big money which can turn into a big wealth.

Investors do fundamental analysis for doing value investing, so that they can find good companies that have strong business, growing year after year, good and honest management. In fundamental analysis, you should ignore the daily fluctuations in the shares, while you should take complete information about the business of that company, which sector is this company, how is the financial situation, quality of management and there should be no borrowing or debt on the company, etc. and a lot of fundamental parameters should also be seen.

"Luck is made only when you are invested in the right shares for a long time until you will acquired great wealth"


Income tax benefit

In trading, you have to pay 15% short term capital gain tax on the profit that you have made in the shares. You have to pay this tax if you are invested in a stock for less than one year.

While the biggest income tax benefit of value investing is that you have to pay only 10% long term capital gain tax in this. You have to pay this tax if you are invested in any share for more than one year and even if your profit is 100 rupees or 100 crores, you have to pay only 10%. Is this not a big benefit?


Let me now tell you in detail about the strategy of Value Investing.

"To make money in shares, you must have a vision to identify the future direction of the stock, willing to buy it and have to be stay invested in it"

You also know that thousands of companies are listed in the BSE and NSE and if you do not use any good strategy to choose a good company, then you will be lost in the sea of so many companies.

The investment strategy that I am going to tell you, that strategy I use myself to invest in the stock market.

Value Investing is like an ocean in which investors have to go through a long and tedious process to choose good shares, such as financial statements, annual reports, balance sheets and a lot of necessary financial information.

But thanks to what I have learned from many years of practice, I will tell you a very simple strategy that will enable you to start your journey of stock market and for which you will not have much financial information.


1. Choosing Good Shares - After Fundamental and Technical Analysis.

There are thousands of shares in the share market which are listed in BSE and NSE and it is impossible to study all the financial information one by one.

So you can initially filter a good stock by using an easy criterion whose fundamental are very good.


Criteria for filtering good stocks 

- Market capitalization > 1000 Crore

- Sales growth > 10%

- Profit growth > 10%

- Earnings Per Share(EPS) having increasing growth rate for the past 5 years

- Debt to Equity Ratio < 1

- Return on Equity(RoE) > 10%

- Price to Book value(P/B) <= 2 or low compared to peer companies within the same sector

- Price to Earnings(P/E) < 18 or low compared to peer companies within the same sector

- Current Ratio > 1


You do not need to work hard to choose the shares that fulfill this criterion because there are many tools available online by which you can choose good shares such as moneycontrol, EquityMaster, Screener etc.

For example, I put the above query on the EquityMaster tool to select good shares. You can see in the snapshot below.

Apart from this, you can also include other financial ratios in the query that depends on you.


For more information on financial ratios, you can also read our upcoming post, in which we are going to give information about all financial ratios in details.


2. Choose only those companies that you know and understand.

Now you have got good shares out of thousands of shares by using step-1, whose fundamentals are also good. Now you should investigate these selected shares also before investing such as study of annual reports, balance sheet, cash flow etc.

You can also find out more about it by visiting the company's website. You can read the news of this company by going at news website and you can also find on google about the company and the performance of peer companies like this.

Thus, knowing more about these companies, you will get to know about three things about their business.

1. Is the business of this company simple?

2. Whether I understand the company which makes particular product or the service which it provides.

3. Do I understand how this company does business and how it makes money.

It is very important that you understand and know the business of the company in which you are going to invest. In the beginning it is very important to know that because you have just started investing in the share market.

For example, from the shares that we had selected in step-1, I would choose the shares of IT sector like TCS for further analysis.


Because I have good experience in IT sector and I am very enthusiastic to know IT sector, because of which I am also able to understand this business. As we know that IT sector business look very promising in future and I can also predict that the business of this company will also be good in future.

Similarly, my cousin works in the pharma sector, so he has more knowledge of pharma sector companies and hence he would like to invest in pharma sector.

And also there are many other businesses that do not need to know much about their background such as footwear, FMCG and automobiles business etc.

For example, if there is a two wheeler manufacturer in your chosen list, then you do not need to know much about it. Because you know that two wheeler companies have always developed in India due to their increasing demand and roads.

Likewise, when real estate business was doing well in India, then tiles manufacturing companies like kajaria, sanitary companies like Cera, and other companies making products used in construction will appreciate.

In the end, if you do not understand the business of any company, then do some more studies to understand this.


3. Choose only those companies which have good earnings, are stable and have no competition means choose market leaders.

Now you have chosen good companies, which you have done on the basis of financial ratios and companies whose business you understand, but I would like to say that this is not enough.

Along with this, qualitative analysis of these selected companies is also very important.

In business, the qualitative aspect (Moat) is seen as a competitive advantage. The larger the moat, the company has the greater the competitive advantage and the more stable the company's business.

Which means that it would be equally difficult to displace the business of that company and capture its market share.

For example - Apple company is a huge brand and there is also a lot of demand for its products in the market and this gives company a huge competitive advantage which becomes a hindrance for other companies to succeed in the same sector.

There should be no surprise that the investors of Apple company have made huge profits year after year.

Similarly, there are many big and good brands which have made a lot of profits to the investors like - HUL, Titan, Reliance etc.


That is why you should choose companies which have a large moat and due to which those companies are also getting competitive advantage.


4. Choose only those companies which do not have any loan or the loan should be too low.

A large debt can make the future of the company at risk. In step-1, the selection criteria that we used to select good shares were "Debt to equity ratio" and "current ratio" which were taken to select companies which may or may not have debt.

If you are leaving these two financial ratios and choosing your shares, then you should find out how these companies have been paying their debt for the last few years. And if your chosen company is paying its debt well for the last few years and their debt is also decreasing year after year, this is a good and positive sign for the financial health of the company.

Simple steps to check the financial condition of companies

One way is to check the balance sheet of the company which has current liabilities and long term debt. Long term debt matures in more than 1 year and current liabilities are the debts of a company which have to be repaid within the same year.

It becomes very difficult for companies which have big long term debt to pay because the maximum part of the earnings goes to repay the interest of the loan and it becomes very difficult for the companies to spend earnings on other expenses.

In this way the stability of the company is endangered and that company might also have to go bankrupt.

Another way to check the debt of the company is to check its long term debt ratio.

There is a simple formula to check the long term debt ratio which is given below.

Formula --> Long-term Debt Ratio = Long-term Debt / Total Assets

If the value of long term debt ratio exceeds 1, it means that the debt of the company is more than its total assets, which is very dangerous. In this way this company is at great risk and cannot able to meet its financial obligations.

On a simple basis, you should choose companies whose long term debt ratio is less than 0.5, which means that the debt of the company is less.


5. To choose the right share, definitely look at ROE (return on equity) and ROCE (Return on capital employed).

ROE (return on equity) describes the earnings of a company in percentage as it is returned to the shareholders in the form of value.

This method helps investors measure the profitability of the company and also helps in calculating the efficiency of the company on the basis of which the company makes its profit on the money invested by the shareholders.

ROCE (Return on capital employed) is a key criterion to measure how efficiently a company invests all its capital to earn profits.

These two financial ratios have been put together to understand that

- How much a company is worth investing in

- How efficiently does this company use its resources

The high ROE and ROCE of a company indicates that how likely it is for the company to grow in the future.

In the past 5 years, the companies that have the both ratios equal to 20% or more will always sell at a premium valuation in the share market.

So while choosing good shares, keep in mind both these ratios.


6. The company should have competent management, honesty and transparency.

Due to fraudulent management, some people do not trust the share market to invest their hard earned money. There have been a number of cases in the past in which the management of a large number of companies has done wrong deals, fraudulent accounts, misled the shareholders and SEBI and caused great losses to the investors.

One of the famous example is Ramalinga Raju who was the Chairman and CEO of Satyam Company.

So it becomes very important that the company you invest in should have good management, have honesty and transparency. The management of a company consists of its CEO / MD, CFO and others.

Only a company with competent, honest and transparent management can make big wealth for their share holders.

Let us know that there are ways with the help of which we can know whether the management of a company is good or not.


1. To find out whether the company has a good track record and has not cheated in past.

Search on Google and find out if there is any fraud case registered against the management of the company and also check the old records of management of that company like experience and qualification.


2. Also read the annual report of the company.

The annual report of a company contains complete information about it, from which you get to know everything about the company and its management. By reading the annual report of a company, you get to know its management, analysis of its strategy and understanding of the future.

Of course everything looks very good in a company's annual report because this annual report is prepared by the CEO of the company to woo share holders. But you will come to know from experience which data is real and which data is fake.

You can download the annual report of a company for free from its website.


3. Check the share holding pattern of the promoters of the company.

The more the promoter's shareholding is in a company, the more positive the signal goes to the stock market about the company. The shareholding of promoters may also change every year or every quarter.

Therefore, if the promoters are gradually increasing their share in the company, it means that their confidence in the company is increasing. And then this company becomes a good choice to invest.


7. Buy shares at their right prices.


If you have reached this step, then you have definitely chosen good shares to invest. Now only one question remains that what is the right price to buy a stock.

Now I want to tell you what Warren Buffett has said about the share price - "The price is what you pay for the stock and the value is what you get for the stock"

Choose the most valuable company and invest in it by paying the lowest price.

No matter how good a company is, you can lose money if you buy it at a stable price and if the price of that share does not increase according to the expectations.

By buying a stock at its right price, you can avoid any fluctuation or risk in future. This true value is often less than the book value of that company.

When a stock is getting less than its original price with great discount, then it should be bought immediately.

It does't matter how good a company is, you might lose money if the price of that share does not increase according to the expectations.

By buying a stock at its right price, you can avoid fluctuation or risk in future. This true value is often less than the book value of that company.

When a good stock is available in less than its original price and with great discount, then it should be bought immediately.

Accordingly, by buying shares very cheaply, the chances of it's growing in future are high.

Now I will tell you the method or formula for deriving the intrinsic value of a company.

I do not say that this formula gives the exact value but it is very good for new investors to get a fair price for a company.

The formula is as follows -

Intrinsic Value = EPS (Earning per share) * (8.5 + 1 * (Expected annual growth rate))

Now if a good share is available expensive, then wait for it to come at the right price and buy it only when it is available at its fair price.

Note - You should not buy a stock only on the basis of this formula. Please check the original price with the help of fundamental analysis and such tools are also available such as DCF Model by which you can find out the actual price and match it with the price you get from this formula.


How to create a stock portfolio

There are two ways to create a portfolio -

1. A portfolio with a lot of diversified stocks, 15 or more shares for example.

2. Concentrated portfolio with less shares, for example at least 5 and more than 12 shares.

There are many investors who adopt one of these two methods and achieve big success in building portfolio.

I recommend that you should build a diversified portfolio in which you should invest in the top shares of every sector.

The reason behind this is that not all sectors are in the bull run all the time, some sectors also have a bear phase. Therefore, when the bear phase of a sector is going on, then at that time start investing slowly in the good shares of that sector.

Similarly, some shares are growing very fast and some are falling very fast. In this way, in some shares you are making profit and in some you are making loss or less profit. So to balance this profit and loss, you should invest in good shares of all sectors so that your overall returns are higher than any index return.

For example, I want to tell you that the Pharma sector and Auto sector have been falling for the last few years and this year in 2020, these two sectors have made good returns to investors.


How much shares need to be purchased in Portfolio for allocation.

You should buy all the shares in your portfolio at an equal price.

For example, if you want to invest 1 lac in 20 shares, then you should invest equally 5000 rupees in every share. This should be done because if you have invested more in one share and invested less in the remaining shares, then in case if the share in which you have invested more can perform againts your expectations and you can get loss in overall portfolio.

Thus if you invest equal amount in every share, your chances of loss in overall investment will be very less.


Conclusion

You do not need any degree or qualification to invest in share market. There are many good investors in the world who have very simple education and qualifications.

Investors who want to start investment in the share market can read this article and start with a small amount. Peter Lynch, a very big investor and author, says that "Only up to third standard mathematics is required to start investing in the stock market".

Thus, the conclusion of this article can be understood with this simple formula given below.

Successful Investor = Selection of good company + Buy at right price + Hold for long time with patience


How do you like our article, do tell us in the comment box below and do not forget to share this article with your friends.


With Respect

Team Nivesh-Shakti

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