Contents
Introduction
How to invest in shares? I think the above quotes from the two stalwarts of the share market throw a lot of insights into share market investing. It is no rocket science. The more you seek knowledge about the share market, the more you learn about it the more you will be well equipped to earn consistently from the stocks that you have invested in. One of my favourite quotes from Warren Buffett is as under:
“Rule #1: Never lose money.
Rule #2: Never forget rule #1.”
Knowing how to avoid loss in the share market is the most important trick that you need to learn before anything else. Let’s say that you invested Rs.1 lac in a basket of stocks. Now suppose due to some market correction, you lose Rs.50,000 out of it. Do you know what percent of the money you need to earn back so that you can make up for your loss? Most people will say its 50%. But the actual answer is 100%!! Think about it again.
Initially, you had Rs.1,00,000 with you. After you lost Rs.50,000 you are left with Rs.50,000 in hand. Now in order to make up for your loss, you need to earn Rs.50,000 back which is 100% of the amount that you currently have with you. Such is the price that you have to pay for losing money in the share market.
Hence it is mandatory to avoid loss in the share market as much as possible. If you know how to avoid loss then you will automatically be able to earn well from the stocks that you are holding. It is as simple as that. And the key to knowing how to not lose in the market is to constantly educate yourself about it. Read books on share market investing, follow blogs such as this one, browse through newspapers on finance such as ET wealth, Mint, Financial Times, etc. to keep yourself updated.
Often I have heard people say, “ I am busy with my work, I hardly get the time to read books on share market investing” or “How do you find the time to read?”. Well, these are not invalid questions, I agree. In today’s world where family and work priorities co-exist, it is indeed a challenge to take out time for reading. But then who said success comes easy in life. In life, if you want to have something you must be willing to make some sacrifices for it. As the saying goes, no pain no gain.
I believe everyone can take out at least 30 minutes every day for reading. Get up from bed an hour or half an hour earlier. And utilize that time for reading. Or after lunch break in office, take out 10-15 mins for reading. While traveling to office or returning from work, you can spend the time reading.
Why should you invest in the stock market?
Given the number of investment options available in today’s world, why on earth should you invest in stocks you may be asking. Well below are 5 top reasons why investing in stocks is a great idea.
- Opportunity to own an existing business: The moment you purchase a stock of a company, you become a part-owner of that business. Now isn’t that a great feeling? No hassles of managing or running that company, no tension of churning out profits/sales. You get to own a part of the business minus all the headaches of running a business. Even if you start a grocery shop of your own, you will have to put in a considerable amount of money. And you are not even sure if that venture will succeed or not. But in this case, just by paying a few hundred or thousand rupees, you get to be a business owner. Now, aren’t you feeling like a boss already?
- Liquidity: With stocks, there is no lock-in period. Nobody tells you that you have to hold these stocks for a minimum X days before you can sell them. No, the decision is completely yours. You can buy/sell at the single click of a button or through a phone call.
- An astounding number of choices: You get to choose the company whose shares you want to own from a wide array of companies listed on the exchange. Starting from IT, pharma, automobiles to retail, infrastructure, transport there is a lot of options available to you.
- No hassles of negotiations and brokerage: With stocks, the price is right there for you to see. No hassles of negotiating with the opposite party. The brokerage is usually pretty low too (usually a maximum of 0.5%). This helps ensure that a substantial part of your investment is not eaten up by frictional costs.
- The prospect of a higher return: If you invest in quality stocks, you can definitely expect to earn a much higher return than your other conventional investments like a bank, FDs, etc. As the business that you partially own grows, the profits will be shared with you in proportion to your investment in the form of dividends. And also the value of the stock will appreciate. So you get dual benefits: dividend as well as capital appreciation of the stock. Now isn’t that wonderful?
Beginners guide on how to invest in stock market
Any time is a good time to invest in the share market. Often I have seen people asking about the right time to start investing. Well, the answer to that will be there is no right time for investing. Whenever you have the money ready, you should invest it right away without waiting. Do not try to time the market. The share market with all its complexities is a hard dude to predict. So the best approach for beginners will be to invest a fixed amount periodically (preferable monthly) into buying quality stocks. And then they should hold those stocks as long as the business is doing well.
In the starting phase of investing, it will be best for beginners to invest only in large-cap companies or blue-chip stocks. It will be in their interest to stay away from small and mid-cap stocks at least in the initial days. Blue-chip stocks are stocks of large well-established companies that are already doing good business for a long time. Typical examples can be TCS, Infosys, ITC, Reliance, HDFC Bank to name a few. The benefit of investing in these companies will be the safety of cash that they will offer. Although one cannot completely rule out the possibility of losing money, one can say for sure that the volatility and hence the chances of loss will be less for these stocks. On the flip side, however, you have to be satisfied with a moderate return from them. Depending on the performance of the company, you can expect a return in the range of 10-12% minimum from these stocks. But provided that you hold them for a long time or as long as the company is doing well.
Read: What are the common mistakes made by a first time investor in stock markets?
A word of caution for investors who are starting new: Please please please stay away from the advice and stock tips provided by self-proclaimed market experts in television, news, and magazines. Most of the time these tips are given by brokers who do not have your best interests in mind. They are just concerned about convincing you to buy/sell your stocks. It does not matter to them whether you make money or not. But with every transaction, they will keep on adding cash to their own pockets. Had they been so expert in share market investing, then they would have by now quit their jobs and lived in sprawling villas and roamed around in their Mercedes. What is the need for them to still sell stock tips and advice?
Also, it will be better to avoid asking your friends/relatives, etc. for stock recommendations unless they have a proven track record in the stock market. They are as much at a loss in this matter as you are. Blindly investing based on someone else’s advice is the biggest mistake that you can commit. I would always advice you to spend some time each day and do the research on your own. As I have said above, spend some time daily to learn about the stock market so that gradually you also become knowledgeable enough to take your own decisions. If still, you are at a loss then I would recommend you to seek professional help. But be careful while choosing your financial advisor as not everyone out there is genuine and qualified enough to help you out in this regard.
Never invest in a company that you don’t understand. Also don’t indulge in short term trading, always invest for the long term. There is no get rich quick scheme in the stock market. It is a game of patience and discipline. Those who claim that they have earned money through trading may have been able to do it once or twice. But it is almost impossible to keep repeating this feat every time. And when you lose money in trading, you lose big. The loss may even wipe out all your profits till date plus the capital.
When I started on my investing journey, I made a lot of mistakes while purchasing stocks. I blindly followed the advice of TV and online experts and purchased shares of less well-known companies. I was hoping that within a few months’ time, I would be enjoying the profits. But that never happened. The stocks kept on decreasing in value. Still, I held them hoping that someday the price will again bounce back so that I can at least recover my losses. But that day never came. Eventually, I sold off the entire lot and booked a loss. I am happy that I did that. Otherwise today I would have been in a worse condition. After that, I purchased only blue-chip stocks like TCS, Auropharma, Infosys, Reliance and HDFC Bank which I am holding even today. I have earned decent returns from them.
What are the factors that long-term investors must look at while taking an investment decision?
Business model:
Undoubtedly, the very first thing that any investor must look at is the business/sector that the company operates in.
Management:
The management is another extremely important factor to consider before investing in any company. At the end of the day, it is the management that will be the driving force behind the future direction and success (or failure) of the company.
Competition in the industry:
The company’s competition is another major factor that you as an investor should look at before deciding to buy (or not buy) that company’s stock.
Financial analysis:
This, of course, is one of the major factors that most investors already look at. It includes doing a detailed study of the company’s financial position and performance over a reasonably long period of time. Such a study is commonly known as ‘fundamental analysis’.
Dividend yield:
Dividends are a form of income from shares and regular dividend-paying companies do provide some comfort that their profits and cash flows are stable enough for them to keep paying dividends each year.
Value:
And finally, the last step in deciding whether or not to buy a stock – the valuation phase. While the business model, management, fundamentals, and market positioning of the company may be the best, if the stock is trading at valuations that are unwarranted, then it is not worth buying the stock.
At the end of the day, we believe that investing in shares is all about conviction – if you are not convinced about the company, then do not stake your hard-earned money.
Where can I get all the necessary information from?
In today’s hectic world, it is a challenge for retail investors to find out time to study the stock market. By retail investors, I mean people like you and me who are working in a full-time profession. We are not directly linked to the stock market like a stock analyst or a person employed with a mutual fund house. Most of our time goes in office work or in carrying out household work/family responsibilities. How can you then stay updated with the stock market news and happenings?
Well, there is no straightforward answer to it. You will have to take out at least 10-15 minutes from your busy schedule to study all this news. This I think should be manageable. While you are traveling to the office, returning from office, lunch break, evening tea break, etc., these are all great opportunities to refresh your stock market knowledge.
Having said that, below are some of the sources which can help you to stay up to date on the latest news.
- StockEdge app: This app is available for both Android and iOS platforms. It is one of the best apps available for stock market news and stock analysis. It covers all the minute details of analysis for stocks and is a very handy tool. You can choose to follow certain stocks and read about the latest news on them.
- Equitymaster app: Similar to the above one, this is also a great informative app on Indian stock market. It has a wide range of tools like portfolio tracker, market monitor, profit hunter, etc. It has a wealth of information on stock market investing written by some of the experts in the industry.
- Moneycontrol app: A gem of an app with all the latest news about the stock market beautifully curated and presented in a neat fashion.
- Economic Times Wealth: When it comes to finances, ET Wealth cannot be far behind. It is an online news publication that covers a wide range of topics on finance like mutual funds, stock market, insurance, tax, etc. The stock market section is especially rich in insights and investing ideas.
In India, there are plenty of brokers available through which anyone can start investing in stocks. Below are the top 10 stock brokers in India:
- Sharekhan
- Zerodha
- ICICI Direct
- Angel Broking
- Kotak Securities
- Edelweiss
- IIFL
- Motilal Oswal
- HDFC Securities
- 5Paisa.
Personally I use Sharekhan for my investing needs. Their customer support and website is pretty good. It is very easy to open your account as well. You have to just let them know that you want to open an account and they will guide you through the rest of the process. I use the stock SIP option present in Sharekhan for investing in the share market. This option gives me the flexibility to invest a pre-defined amount into purchasing stocks every month on a particular date. It is similar to the SIP option in mutual funds. Thus irrespective of the market condition, I keep investing a fixed amount every month into quality stocks.
Conclusion
“I constantly see people rise in life who are not the smartest, sometimes not even the most diligent, but they are learning machines. They go to bed every night a little wiser than they were when they got up and boy does that help, particularly when you have a long run ahead of you.”
― Charles T. Munger
I would like to end the article with the above quote from Charlie Munger. Life is like a marathon where there will be many obstacles on the way. Sometimes you will get discouraged and feel like giving up. But you have to keep on moving. Similarly in share market investing, there will be many ups and downs. Sometimes you will make mistakes and lose money. You may feel a little down at that point in time. But the key is to learn from that setback and move on. Spend some time every day to learn new things and keep yourself updated with the latest news on the stock market. Soon you will find that you have become an expert whom other people look up to and reach out for any help/queries.