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How to Start Investing in Share Markets in India 2020 | Step by Step guide for beginners



How To Start Investing in Share Markets in india 2020 | Step by Step guide for beginners


There are many top investors who beat the Nifty by generating returns in the range of 35% to 60%. They bagged big profits because of their years-long experience with stock markets.


In my initial days of investing,
I did not make any profits because I was investing in stocks after listening to the stock tips from brokerage houses (and so-called experts on TV channels).
It’s their business. Everyone from a brokerage house to financial websites to experts on TV channels makes you believe that investing in stocks is very complex like rocket science. After all, if you know how to select stocks on your own, then how would they make money.


how to invest in stock market
Step by step guide to invest in stock market 2020


But, what if I tell you that there is an easy and simple way to identify some great stocks!

Disclaimer: I do not recommend any particular stock. The stock names mentioned in this article are purely for showing how to do analysis. Take your own decision before investing. 
You make profits from the stock market with your own analysis…
.. and in this article, I am going to guide you through a step by step approach to select great stocks and how to invest in the stock market in India in 2020.

6 steps to invest in share market in India for beginners

Types of Investing – Trading vs Value Investing
Step by Step approach to Invest in Share Market in India

Step 1. Screening and Filtering the right stocks using Financials
Step 2. Select only the companies that you understand
Step 3. Look for companies with sustainable Moat (competitive advantage)
Step 4. Find Low Debt Levels
Step 5. Use financial ratios RoE and RoCE to identify the right stocks
Step 6. Honest, Transparent, and Competent Management
Step 7: Right Price to Buy the Stock

Portfolio Construction
Portfolio Allocation
Conclusion



6 steps to invest in share market in India for beginners

Let’s see a step by step guide on how to invest in the share market in India

  • Screening and Filtering the right stocks using Financials
  • Select only the companies that you understand
  • Look for companies with sustainable Moat (competitive advantage)
  • Find Low Debt Levels Companies
  • Use financial ratios RoE and RoCE to identify the right stocks
  • Honest, Transparent, and Competent Management
  • Find the Right Price to Buy the Stock

You can learn about stock investments with as little as Rs. 10,000 investment. 

If you don’t have demat account, then choose one from the list of best demat and trading accounts in India. You can read the full review of the Upstox demat and trading account review, which is my favourite service provider for offering the fastest demat account.



Learn the approach and apply with 10,000 investment, if you make 5000 profits in the first year then the same approach can be applied with Rs. 10,00,000 investment to make Rs. 5,00,000 as profits in the future.


Learning is more important than earning in the initial days.

Disclaimer: The stocks mentioned in the article is not a recommendation to buy or sell. We are taking them as an example. Invest in the stocks after your own due diligence.

Types of Investing – Trading vs Value Investing

Before I run you through my step by step approach for picking stocks, let’s first understand the two different methods to make profits in the markets and which of the two methods is practised by the majority of the leading investors across the world to create wealth for themselves.

Trading
Value Investing
You are wrong if you think trading and value investing are one and the same thing.

Trading focuses on making frequent profits over a shorter time frame irrespective of the rising(bull) or falling(bear) markets.

During rising markets, trading involves buying at a lower price and selling at a higher price within a short period of time. They make profits in falling markets by selling at a higher price and buying at a lower price, also referred to as short.

Since, trading style involves entering and exiting at a shorter time frame, the holding period of the stocks is no more than few minutes or just a day or in some cases a maximum of few days.

People practising trading style make use of tools like technical analysis that makes use of complex indicators such as moving averages, stochastic oscillator to forecast the future price movement of the stocks.



A screenshot below showcasing technical analysis charts to predict the price movements of Axis bank stock.
how to start investing in stock market - axis bank movement


Trading can be dangerous (heavy loss-making) because of the huge volatility in the stock prices. If you do not have a clear strategy and are not fast enough you could end up with huge losses, wiping out all your money. If you are interested in trading then you can learn how to start stock intraday trading in India.
The market is full of such examples of men who lost money indulging in trading.
I tried trading a few years ago, made a profit of Rs. 10,000 on the first day and end up losing more than 100,000 in the next few days. I knew that trading is not my cup of tea.
I focused on my strengths, that is researching stocks and holding for a long period.

Let me introduce the art of value investing.

Warren Buffett says, “If you aren’t thinking about owning a stock for 10 years, don’t even think about owning it for 10 minutes.”According to him, you should invest in companies that you can hold forever.
The biggest advantage investors gain by holding stocks for such long periods is the advantages of dividends, stock splits, and most importantly dramatic rise in stock’s price levels as the underlying business (of that stock) grows profitably over the years.
waren buffet investing idea
Such stocks are referred to as multi-baggers for the multifold returns that they generate for value investing practitioners.
The other advantage value investing offers over trading is that one gets to ride out the fluctuations in the stock price caused either by external events or business downtrends with the belief that the stock price will eventually recover and reward the investors with handsome profits.
Warren Buffet, the legendary value investor that every investor looks up to created wealth for himself by investing in good stocks and holding them for a long period of time.



What you are seeing in that picture is the power of compounding at play, which is at the core of value investing. When you hold stocks for long periods of time, it results in exponential growth creating huge wealth.

People practising value investing make use of fundamental analysis to draw conclusions about investing in a stock. In fundamental analysis, you ignore the daily price fluctuations but instead focus on studying the underlying business of the company, the sector in which it is operating in, its financials, the quality of management, and more.

Whereas people who practise trading aim to make a quick 10 to 20% return on a stock and then sell it off to move onto other. This way you might be able to make profits but never create wealth.


Income Tax Benefits
With trading, you end paying 15% short-term capital gains tax on every profit transaction you make since your holding period of the stock is definitely less than 1 year.
Whereas, with value investing, your capital gains tax is 10% irrespective of your profit being Rs 100 crores or Rs 100 when you hold the shares for more than one year.

Step by Step approach to Invest in Share Market in India

George F. Baker, an American financier and philanthropist once famously gave the mantra
“To make money in stocks you must have the vision to see them, the courage to buy them, and the patience to hold them.”
There are literally thousands of companies listed on the BSE( Sensex) and NSE(Nifty). Unless you are armed with an approach that you could use to filter out, you would get lost in the sea of companies.
The investing approach that I am going to share with you is the one that I personally practice to filter stocks before investing in them.
Value investing is an ocean in itself and its practitioners go through a tedious process of analyzing stocks by reading through the financial statements, annual reports, and various other information pertaining to the financial health of the company before investing.
But, based on my learnings over the past many years, I have come up with the following simple and practical steps that you use to kick-start your journey of picking stocks even without having deep financial knowledge.
You will need a Demat account to start investing in stocks. I would recommend you hdfcsec due to its lowest brokrage charge.

Step 1. Screening and Filtering the right stocks using Financials

There are thousands of stocks listed on BSE and NSE and it’s almost impossible to investigate each and every one of them by going through their entire financial information.
Therefore, for your initial consideration, you can use the below easy to implement screening criteria to filter out those stocks whose fundamentals look strong.
Screening criteria
    how to invest in stock market
  • Market Cap > Rs 500 cr
  • Sales and Profit growth >10%
  • Earnings Per Share(EPS) growth rate is increasing for the past 5 years
  • Debt to Equity Ratio <1
  • Return on Equity(RoE) >20%
  • Price to Book value(P/B) <= 1.5 or low compared to peer companies within the same industry
  • Price to Earnings(P/E) < 25 or low compared to peer companies within the same industry
  • Current Ratio > 1
You don’t have to scratch your head to get the above financial information. Online screener tools available on financial platforms like Moneycontrol and EquityMaster provide this information readily.
For example, with the help of Equitymaster’s free stock screener tool, I applied the above screening criteria to filter some of the stocks for my initial consideration.
You can then check the other financial ratios as part of the screening criteria by clicking on the company factsheet.
how to invest in stock markets

Step 2. Select only the companies that you understand

Now that based on Step 1 you have filtered out stocks with good fundamentals from rest of the garbage, learn more about these stocks by reading about the underlying company as much as you can.
You can do this by visiting the website of the company, tracking updates on media platforms, searching for the company on Google, and getting peer feedback from fellow investors.
Learning more about the company will help you to understand the company’s business and will provide answers to three key questions
  • Is the company’s business simple?
  • Do I understand the product/service?
  • Do I understand how the business works and makes money?

It is important that you invest in companies that you understand, at least in the initial stage when you are learning to invest in stocks. That way you will be ensuring that you don’t lose money.
For example, from the stocks that we filtered in Step 1, I would have looked at technology stocks like Tech Mahindra, Vakrangee, and Mindtree Ltd to begin with.
how to invest in stock market

That is because, I have significant work experience in the IT sector and I am also passionate about technology which makes it easy for me to understand these businesses, the reasons for their growth, and predict how the future could turn out to be.
Similarly, my cousin comes from a Pharma background and therefore it would be easy for him to understand the stocks in that sector.
There could be many businesses that may not require any kind of background to understand at all – think consumer products like footwear, shaving cream, automobiles etc.
For example, your filtered list of stocks has a two-wheeler manufacturing company. You need not to have a background in the two-wheeler industry to know that the two-wheeler sector has always shown growth in India due to increasing demand and better road connectivity.
Similarly, when the real estate sector was growing in India, then the companies which manufacture tiles (Kajaria), sanitary (Cera), and similar supporting companies could be accessed.
The business model of the company should be simple and the company should excite you.
Lastly, if you do not find any stocks (companies) that you can right away understand, spend time studying the company and its sector.
You would also like to read – Best investment options in India 2020
Step 3. Look for companies with sustainable Moat (competitive advantage)
It’s not enough that you identify companies that have passed the test of financial numbers and whose business models are easy to understand.
It is equally important to analyze the company from a qualitative aspect – Moat.
In business terminology, Moat is the competitive advantage that one company has over the other within the same industry. The wider the moat, the larger the competitive advantage of the company and more sustainable the company becomes.
Which means, it would be very difficult for the competitors to displace that company and capture its market share.
Now, that’s a stock(company) you would want to select and invest in.
Examples of this Moat can be brand power, intellectual property rights and patents, network effects, govt. regulations controlling barriers to entry, and many more.
For example – Apple has a strong brand name, pricing power, patents, and huge market demand that give it a wide moat which acts as barriers against other companies.
No wonder that Apple is close to becoming a trillion-dollar company and has generated huge profits year after year, making great returns for its investors.
Another simple example of brands with strong moats is Maruti, Colgate, Fevicol which have huge recall value in public memory.
Given its huge distribution network across many states and the push for digitisation from govt, it would be very difficult for a new competitor to displace them off the market.
No wonder that the stock’s price soared from Rs 16 in 2010 to Rs 500+ in 2017. (Note: The current prices may go up and down based on the short-term pain in the markets)
So, look out and identify such companies with strong moats in the initial days.
Step 4. Find Low Debt Levels
Large debt levels pose a significant risk to the company. Couple of screening criteria which we used to filter the stocks were Debt to Equity Ratio and Current Ratio.
These two ratios are indicators of how heavily is company dependent on borrowed capital(debt) to fund its growth and whether the company will be able to meet its short-term capital obligations.
So when you are selecting stocks, apart from these ratios, check out how the company is handling its debt over the past many years. The company that is reducing its debt will automatically increase its profits which is a positive sign for the financial health of the company.
Simple Tips to Check Financial Health:
One way to do this is to check the company’s balance sheet where the company’s current liabilities and long-term debt is listed. In general, long-term debt is the debt that comes to due after a period of 12 months. And current liabilities includes the company’s debt that must be paid within the year.
Companies with too much long-term debt will find it hard to pay off these debts since most of their capital is going to interest payments, making it difficult to use the money for other purposes.
This poses a risk of sustainability and may lead to the bankruptcy of the company.
For example, below is the Tech Mahindra’s balance sheet showing the decreasing long-term debt from the year 2012 to 2016 which is a positive sign for the company.
how to invest in stock market

Step 5. Use financial ratios RoE and RoCE to identify the right stocks

Warren Buffett makes use of these two financial ratios RoE(Return on Equity) and RoCE(Return of Capital Employed) to aid him in selecting the right stocks.
According to Investopedia, RoE is the percentage expression of a company’s net income as it is returned as a value to shareholders. This formula allows investors as an alternative measure of the company’s profitability and calculates the efficiency with which a company generates profit using the funds that shareholders have invested.
RoCE is the primary measure of how efficiently a company utilizes all available capital to generate additional profits.
These two financial ratios put together with help in understanding
  • How profitable a company is in terms of investments
  • How efficiently it is utilizing its resources
A company with high RoE and RoCE signals the great potential for future growth in value of the company.
Let’s take the example of Avanti Feeds, one of the stocks that we filtered using the screening criteria. As seen below in its balance sheet data, the RoE and RoCE are above 20% for the past 5 years and more or less have been increasing.
Companies that do well on these two ratios by being above 20% and increasing for the past 5 years command premium valuations.
Avanti Feeds stock has risen by over 7000% in the past 5 years creating huge wealth for its investors.
So, when selecting stocks, look whether the RoE and RoCE meet the criteria that I explained above.

Step 6. Honest, Transparent, and Competent Management

Fraud management is one of the reasons some people do not trust the stock market with their savings. There have been many cases in the past where management of listed companies did shady deals, committed accounting frauds, misled shareholders & SEBI, causing a lot of monetary loss to investors.
A famous example being Ramalinga Raju of Satyam.
Therefore, it is very important that the stock and by extension the company you plan to invest in is run by honest, transparent, and competent management. The management includes Promoters, CEO/MD, CFO among others.
One such company run by competent and honest management that has created huge wealth for its shareholders is the one that I discussed earlier – Avanti Feeds.
As an investor, there are few ways to check if the management of the company has its heart in the right place or not
1. Search for fraud and track record
Use Google to search the names of the management and check whether there are any reporting of fraud against the company executives. Also, check their professional qualifications and their track record.
2. Read Annual Reports
Annual reports are a treasure trove of data to get a full understanding of the company and its management. Studying annual reports helps you to understand the management’s analysis, strategy, notice, and future vision for the company.
Ofcourse, on the face of it, everything would look good as the CEO of the company who has prepared the annual report wants to keep the investors interested in his/her stock intact. But, with experience, you will learn to figure out who is genuine and who is bluffing.
Tip: You can get the annual report at the company website as a free download. Alternatively, you can email the concerned investment relations in charge and get the annual report copy emailed.
3. Look out for Promoters shareholding
Higher the promoters shareholding in the company, the more positive signal it sends out to the market. In general, the promoters shareholding in the company may vary over the past many years.
However, if the promoters are increasing their stake in the company, it means that they have trust in the company, making it a good company to invest in

Conclusion

You don’t need an elite MBA or a Finance degree to know how to invest in stocks. Some of the best investors in India and around the world come from very humble and normal academic backgrounds.



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