Investing in stocks is an excellent way to grow your portfolio as well as wealth. However, starting stock market trading in India is easier said than done. There are a plethora of considerations to keep in mind before you start investing. Whether you are a beginner or an experienced investor, our Stock Market Tips in India guide will help you understand the basics of stock market trading and how to get started.
There are many top investors in India who beat the Nifty by making huge returns in the range of 30%-60%. Because of their years-long practice and experience with stock markets and professional help, they have managed to bag big profits.
With that said, here is our ultimate guide selecting great stocks and investing in the stock market in India.
Let’s jump right into it.
#1 Use financials to filter the right stocks
Since there are hundreds and thousands of stocks listed on NSE and BSE, it is challenging to analyze each one of them. However, with the financial information, you easily screen and filter the right stock for you.
The following are the screening criteria to find the right the stock:
- The market cap should be greater than ₹500 crores
- Profit and Sales growth of the company should be greater than 10%
- EPS or earnings per share growth rate of the company should be increased for the past five years
- Debt to equity ratio should be less than 1
- Return on Equity should be greater than 20%
- Price to Book value should be less than or equal to 1.5 or less compared to competitors within the same industry
- Price to Earnings should be less than 25 compared to the competitors within the same industry
- The current ratio should be greater than 1
With an experienced and professional financial investment adviser by your side, it will become easy for you to analyse the stats, understand the terms, and choose the right stock.
#2 Choose a company that you understand
Based on the companies that you screened and filtered in the first step, you need to learn more about them, including their underlying principles, their industry, and more.
This can be achieved by simply visiting the company’s website and tracking any updates on them through media platforms. Before you choose a company to invest in, it is important that you ask the right questions. The most critical questions you can ask yourself include:
- Is the business simple?
- Do I understand the company’s offerings – product or service?
- Do I understand how it works to generate revenue?
Experts suggest that you should only invest in companies that you understand, especially if you are a beginner. This is to ensure that you don’t lose your hard-earned money.
Industries like IT, oil, banking, etc., require investors to have a thorough understanding before investing because these industries work in extremely volatile markets. On the other hand, industries like beauty, healthcare, automobile, etc. don’t require you to have any background to understand the industry. Investing in them is easy. So, consider these aspects.
#3 Go for a company that has a competitive edge in the industry
It is great that you identified companies whose business models are easy to understand and based on the financial numbers mentioned above. However, you need to equally invest your time in analysing the company’s qualitative aspect or you can say the competitive advantage.
Competitive advantage or competitive edge is what a business has over the other businesses within the same industry. The bigger the competitive advantage, the more sustainable the business will become.
Having a competitive advantage means it is difficult for other businesses (competitors) to dislodge the company and seize its market share.
This is a type of company (stock) you need to look into if you are considering investing. Competitive advantage can be defined by the brand power, network effects, government regulations controlling barriers to entry, patents and intellectual property rights, and more.
Consider Maruti Suzuki for example. It is one of the largest car manufacturers in the world and the biggest in India. It has a strong brand name, patents, pricing power, and huge market demand. All these aspects give Maruti Suzuki a competitive advantage over the competitors in the automobile industry.
#4 Determine the right price to buy the stock
Last but not least, the company (stock) you choose must be maximum valuable at a minimum price. Let’s get things clear on price and value. The price is what you pay to buy something, and the value is what you get in return. Always, the value should be higher than the price you pay. At this stage, you might need professional help in the form of an investment adviser who can help you determine the right price to buy the stock.
There are always risks looming around the stock market. Thus, it is important that you take every step carefully after thorough investigation.