Stock Market Investing – A Primer for Beginners
Investing in Stock markets
Investing in the stock market gives superior returns over the long term and is more tax efficient than all other forms of investment. If done rightly you can get a return of 12-15% over the long term. You can either invest directly or through mutual funds.Stock market investing requires patience, risk-taking capability and time. Never invest on tips or just because a particular company is the flavor of the season. Reading financial reports and checking financial ratios may not be easy for everybody but you could look at a few things before making that investment.
Going by your gut instinct is good if you have long experience in picking stocks and if you keep in touch with news flow on what is going on in the sector or the particular company. If you are a beginner it is better to test your hypothesis with some data before you jump in to buy. It would be a good idea to start reading a business magazine which gives in-depth articles about companies or a particular sector.
If your investment decision is based on recommendations by some popular business news channels then the outcome may not be very positive. It is best to take information from all media, do some study yourself, arrive at your own conclusion and start investing. Stock Market investing is not rocket science and if you can keep in mind a few points, you too, can pick up good stocks and reap the benefits of higher returns. If you plan to invest in the stock market then the first lesson is to cultivate patience and humility. Try not to invest when the market is running up. Do not think that you will lose the opportunity and buy at a higher price. Always time your purchase when sharp corrections take place. Always remember that success does not beget success in the stock market. Do not be overconfident if you get a few picks right.
Choosing a company to invest
There are more than 6,000 stocks listed in the Bombay Stock Exchange and over 1,200 stocks listed in the National Stock Exchange. Many are listed on both. The stock exchange itself takes the best stocks [30 for BSE Sensex and 50 for Nifty] to make the index and usually picks the companies that are consistently profitable and those that have good corporate governance and show consistent performance. So one easy way out is to select a few among these index stocks in a downturn.
Another method would be to check the last quarter performance and then select a few companies that have shown good growth in sales and profitability. You can get this data from moneycontrol.com (website) or stock specific magazines like Capital Market or Dalal Street. Then look at quarterly performance over, say last 4-6 quarters and see if operations are improving. Look for consistent sales, operating profit and net profit numbers. A rising interest cost without a significant rise in sales in the subsequent quarters will indicate that the capital is not being deployed efficiently. If other income is contributing to a big chunk of the profit, be cautious. Do not go for companies which have mountains of debt. You can check this in the balance sheet or just by looking at the interest being paid from the quarterly result statements. In this way you could get a fix on a list of stocks that you need to keep watch on. Once you have a list of companies ready, visit their websites and check out the products they make. Search the Internet for news on the selected companies. Make a start, put in maybe 1 hour a week and you will soon be surprised to find that stock picking is not as difficult as you thought.
While buying the selected company fix an amount you would like to commit to a particular stock and allot about 50% of the money and then watch the movement. Please do not get into the habit of monitoring daily. You can do it on weekends and incase the stock moves down you could steadily increase your holding. If it runs away do not jump and invest the balance; wait for it to stabilize and see if it offers value at the higher price. Time your buys in a falling market and sells in a rising market
Warren Buffet’s philosophy is to buy a stock and sleep on it and reap value. It is often mistaken that Warren Buffet never sells his stocks. This is not true. He is an exceptional stock picker, so unlike us he starts with a big advantage. But he too reviews his investments and sells ones that make money or deviates from his stringent criteria. I would recommend that once you have picked up a stock and it has risen more than 25-50% [you can decide on the limit] you should sell maybe 10-15% of your position. This helps you to recover the capital until you fine tune your stock selection and learn your ropes in the fine art of stock selection. You could temporarily move this profit to a fixed income instrument for further investment in the same stock or any other during the next correction or switch to some other company that you have identified. Never have any emotional attachment to a stock.
Day trading /Short term trading
Stock market investing comes at the higher end of the risk spectrum. If you think that making money everyday by buying and selling on the same day [day trading] and for the short term [within 1 year] is easy, it is fraught with greater risk. In the short term, stock market movements are volatile and impossible to predict. You may think you are an expert at spreadsheets and reading graphs but most of the time it is like throwing a dice. A few can do it but they usually make money more out of years of experience in analyzing daily movements. If you plan to do day trading be extremely cautious. Never do day trading on tips. If you are doing short term or day trading you should never keep your loss making companies with the hope that one day it will give you profits. Sell and move on if the loss is more than 5 %. Likewise if your position is profitable start selling in two or three lots if the market has a rising trend.