There are 2 qualities that are essential in earning money in the stock market: Knowledge and Experience
How to build knowledge?
- First of all, learn how stock market works, how the economy works, what are the various sectors in the economy, and how each sector is impacted by various government policies, foreign investment, market sentiment, etc.
- Identify the future growth prospect of various sectors like FMCG, Banking, Pharma, IT, Automobile, Insurance, NBFC, Retail, Telecom, etc.
- Identify the top-performing companies in each sector. Just look around the brands you use and identify their parent companies.
- Learn how to analyze the qualitative aspect of the company which includes research about the company and its management, brands and product portfolio, identifying the competitive advantage of the company, future growth prospects, etc.
- Learn how to analyze the quantitative aspect of the company by analyzing the balance sheet, profit and loss statement, cash flow statement, and understand the key ratios that are essential in shortlisting quality stocks. For example, growth ratio, leverage ratio, profitability ratio, and management efficiency ratio.
- Learn how to identify the valuation of the company so that you can invest in good stocks at the right price.
How to build the experience?
- No matter how much knowledge you acquire, you need to enter into the real world to gain experience.
- Start with a small amount and invest in top companies. Slowly when you build confidence, increase the investment amount.
- Avoid market noise. You will come across many self-proclaimed experts who will show you dreams of overnight success. Do not take their tips.
- Focus on gaining knowledge. Read the newspaper and articles to understand the factors behind the stock price movement. Read the interviews of market experts to understand their point of view about the economy and the specific stock.
Tips for beginners
- Stock investment is not a rocket science. You don’t need a high IQ or you don’t need to be a financial expert to pick quality stock. It is about understanding how to identify quality stock and controlling the human emotions of fear and greed.
- Most of the people end up losing money just because they become too greedy or too fearful. For example, many people end up investing when the market is at higher level. Eventually, when the market corrects, their investments are at loss. Then they become fearful and exit at loss. Instead, invest in quality stocks and use the opportunity of market volatility to buy more on dips.
- Be a long term investor. If you want to create wealth in the stock market, you need to keep patience and stay invested in the long term. Most of the people lack patience and hence lose money.
- Do not just invest in a company only because it has hit 52 week low. If the stock is fundamentally weak, it could fall even further. Vice versa, if a stock has hit 52 weeks high then it doesn’t mean that you can’t invest in the stock.
- Avoid penny stocks. Do not think that if the stock is available at Rs 10 then you can’t lose much. Well, you could lose the entire Rs 10.
- Avoid investing all the money in single stock as well as avoid investing in 40–50 stocks. Both under-diversification and over-diversification are bad. You should find the right balance. Identify good 10–20 stocks.
- Avoid investing based on sentiments. Generally, day trading is short term investment based on pure speculations. It is very tempting for a new investor to make quick money in no time. But many people end up falling into this quick money trap and invest in fundamentally poor stocks just on the basis of tips. This results in the loss.
How to identify quality stocks?
- Look for a debt-free company or companies with debt to equity less than 1.
- Identify high growth companies with consistent growth in revenue and profits for the last 5 years. Both revenue and profit growth higher than 15%.
- Identify companies with good operating profit margin, high ROCE and ROE ( both ROE and ROCE more than 15%-20%)
- Avoid companies with low promoters shareholding and pledged shares.
- Look for companies with a PE ratio lower than the median PE of the last 1–3 years.
- Identify the leaders in each sector in terms of market cap.
- Identify companies with bright future prospects.
Where to get all the required information?
- Read the annual report of the company.
- Use free tools like screener and moneycontrol.
- Follow good financial newspapers like livemint, economic times, etc.
- Search the recommendation for the stock by various brokerage houses like icici direct, motilal oswal, etc. and understand their short term and long term point of view about the company.
This should give you a good starting point to make money in the stock market.
– Shared by Sahil Bhadviya , Personal Finance Coach and Consultant