So you want to start investing, Huh?
As a beginner, I also asked the same question to many folks (whom I think can guide me) but what I got in reply is ~ Make a habit of reading financial columns, watch CNBC, stay updated with market trends, keep an eagle eye on prominent investors…. blah, blah blah.
But…how the heck do you get started? There’s so much info out there on the web, and everyone’s telling you to do different things. Who do you listen to? Where’s the starting point?
Dammit, maybe you should just forget it – it’s too confusing!
Well, hold up. I used to be an investing newbie too. I had the same problems. I started my first investment 1 year back, and I knew less than nothing about investing.
Now I know a ton of them, and even my finance blog doing pretty well – I receive more than 47,300 unique visitors per month which makes me consider myself someone you could listen to and learn from when it comes to starting your investing career. I’m not some sort of Guru, but I certainly do know the basics.
I promise it’ll be simple and definitely easy to understand (no stupid jargon). I added many examples to make you understand it in more clear way.
Note ~ This guide is 4,000 words long with 24 illustrative images which mean roughly 20 minutes of reading. So grab yourself a tea or coffee. If you get stuck anywhere while reading this guide, send me an email and I’ll do my best to help you out.
Awesome, let’s move on.
The 4 Simple Steps to get Started investing:
- Intro of stock market
- Choose your preferred brokering platform
- Evaluate a stock before you invest.
- Designing your portfolio (the fun bit!)
We made it. Phew. So, without any further ado, let’s jump into step 1.
#1) Some basics of Stock Market.
For a new investor, the stock market can feel a lot like legalized gambling – “People place their bets! Randomly choose a stock based on gut instinct and water cooler chatter! If the price of your stock goes up — and who knows why? — you win! If it drops, you lose!” Isn’t that why so many people got rich during the dot-com boom — and why so many people lost their fortunes in the recent recession?
You may have a “supermarket” that sells food nearby your house. The reason you go the supermarket is because you can go to one place and buy all of the different types of food that you need in one stop — it’s a lot more convenient than driving around to the butcher, the dairy farmer, and the baker.
The BSE/NSE is a supermarket for stocks. It can be thought of as a big room where everyone who wants to buy and sell shares different companies can go to buy and sell.
That buying and selling occur in 2 ways:
- First buying than selling (inter and intra-trading)
- First selling than buying (futures and options)
This buying and selling is often known as bid and offers (demand and supply). That’s how the price of stock market get decided.
Bid price -the price at which buyers are eager to buy stocks.
Ask price – the price at which sellers are eager to sell stocks.
Bid quantity – the quantity of stocks which buyers are eager to buy at the bid price.
Offer quantity – the quantity of stocks which sellers are eager to sell at an offer price.
How stock price changes?
The price is calculated by electronically matching bids and offers for a particular share recorded an electronic limit order book (ELOB). When you place an order to buy a share at a certain price that is called your “bid” and when you place an order to sell your……….blah blah blah blah……..
Getting bored? Going upon your head, huh?
Okay, let’s make it easy.
Imagine you bought a pen for 10 bucks. Next day a friend of your offered you to sell it for 15 to him.
Now my question. What’s the price of the pen?
Absolutely 15. You can encash 15 bucks by selling it.
You rejected his offers hoping that may your other friends bid more than 15.
Next day in school, your friends got a sight of your pen. Again 5 of your friends offered you to sell it for 10, 15, 20, 25, 30 respectively.
Now, what’s the price?
Yeah, 30. The highest bidder urges to pay 30.
Now again you rejected the offer hoping that tomorrow its price may hike more.
Exactly what you thought happened. You and your pen become popular in school and the highest amount offered by people was 50.
Now your greed acted inside you, so you again rejected the offers hoping for some more appreciation in price.
This time the luck was not with you. A companion bought a unique pen than yours.
This affects the price of your pen a lot. Most of your customer attracted by your companion’s pen. Your pen lost 90% of its value and the only bunch of people was ready to pay you 5 bucks only.
This is how demand and supply affect the price of a product. And stocks are a product. When investors are optimist and ready to pay higher cash than its current price, price appreciated and in pessimist behaviour price drops.
There was a huge demand of your in market and supply was only one (assumed that only one pen of your brand was available in market).
But after your companion’s entry, supply increased and demand remains the same, price dropped.
It may also possible that some are ready to pay 15 and some are ready to pay 5 bucks. Although in the real world you’ll sell your pen to the one who is offering 15 because you know their person but in the world of stock market, you don’t know from whom you’re are buying stocks or to whom you’re selling your stocks. In this case, the average price is quoted like (in above case) 10 (5+15/2) provided the weight of buyer and seller are equal.
I can also make it complex by saying that only 2 persons are ready to buy your pen at 15 bucks and 13 students for only 5 bucks. In this case, a weighted average price will be calculated.
But there’s no need to go much deeper just keep a small concept in your mind:
- When demand > supply, price increases.
- When demand < supply, price decreases.
BSE and NSE have huge algorithm machines which determine the price of stocks on the basis of volume traded. Lakhs of people and crores of shares are traded every day.
You can get every information regarding volume traded, bidding, offering etc on the web (a quick example is illustrated below)
(Image from Moneycontrol App)
There are also many other reasons for the change in price like the stock split, merger, demerger, dividend distribution etc.
What? Price changes due to dividend distribution, how is it possible?
Yeah, you heard it right, if interested read an example of Indian stock recently happen on 6th march. (Price declined due to dividend distribution)
Now after having a short overview of the stock market, let’s understand how you can buy and sell real stocks.
You can’t directly invest in stock market. One must find a broker who will act as a mediator to buy/sell stocks. There’s nothing to know more about it.
But still one should choose a broker with great attention. Some brokers charge so high that most of your profit get swallowed by their charges.
This soul-sucking induced me to write this next section.
#2) Choose your preferred brokering platform
Nowadays it’s very easy to get a trading account up and running in a matter of a couple of days.
There are numbers of different web hosting providers. They all offer you a similar service (equity + commodity) with a huge difference in price, but since I’ve dealt with and monitored many famous and recommended share brokers companies like RKSV, angel broker, Motilal Oswal, HDFC sec etc…
I now only use and recommend Zerodha. However, you can always go with another broker as long as it’s fast, reliable and offers low/no brokering charges. This helps you to avoid problems later on.
That’s all about “आहा…” and now let’s talk about some “oh shit!”
As a beginner, I struggled a lot to get registered with a broker. So I consider it a short description in this guide.
There’s negligible trend of young students (+18) investing in the stock market because either theirs parents want them to concentrate on their studies or they didn’t have basic knowledge or they are too much lazy to get needed documents or whatever.
In short, they didn’t get any proper guidance on how to start investing which intent then to lose their spirit in a while.
So, below are some practical guidance…..
As per the rules and regulation following documents are compulsorily needed:-
- Identity proof (PAN card)
- Address proof (Aadhar card… etc)
- Personal bank account (Bank statement)
So if you do not have PAN Card then start the procedure to get one. If you do not have your personal bank account then contact any nearest branch of any bank and get an account open for you. This is the primary step.
So until you get your trading account registered with broker, switch to next step where you’ll confront some parameters on how to evaluate a stock.
Becoming a professional investor is not going to happen overnight. However, if you are serious about becoming an investor, then you need to get started on the right path. A wrong move now can become a serious roadblock later on.
Here’s some roadmap to becoming a successful investor.
#3) Evaluate a stock before you invest.
There are two types of analysis:
Technical analysis mainly deals with intra-day trading and are much difficult to understand. It contains many technical jargons like movement average, regarding strength index (RSI).
It’s not possible to demonstrate them here, still, I’ll recommend you to pursue NSE advanced certification for its deep knowledge.
Let’s move on some fundamental aspects.
Following are some crucial parameters upon which one should look over before locking your money in any stock:
– Return on Equity (ROE)
It shows how much profit company is able to fetch for its shareholder after paying all its expenses. Good sign fit management effectiveness.
– Return on Capital Employed
It shows how much company is earning by cultivating it’s all long term funds.
– Earning Yield
It shows a relationship between company’s current market price and its existing EPS.
– GP margin
It shows a good sign for the economic moat.
– Debt to Equity Ratio
It shows a relationship between fixed interest bearing debt liability and shareholder funds.
– Interest cover ratio
It shows how times a company is able to cover interest expenses from its existing learning.
These are some parameters, which I use and recommend others to evaluate a stock. I read them all in most of the value investing books like intelligent investor, the book that beat the market, value investor and behavioral finance………
Now below are some more criteria which I consider personally (stated with reasons)
– Market Capitalization < 25k crore
This consists mid-small cap companies. These companies have high chances to get appreciated in short span as compared to Large cap companies.
– Dividend consistency
It shows that company is consistently earning enough to pay its shareholders. Dividends are the extra earning which is left after retaining a perfect amount for further expansion and growth. It shows a huge cash reserve available within the company.
– Margin of 15% – 20% on 52 week low.
I usually prefer to invest in a great fundamental stock which is 15-20% nearer to its 52-week low price. It’s not well-defined criteria but helps to minimize risk at great extent.
– Company PE < Industry PE
Again, it’s not a well-defined parameter but helps to find the cheapness of the stock in its existing industry.
– Shareholding pattern
It helps us to know how much of the shares holding is retrain by promoters, DII, FII and retail investors like you and me.
Now let us try to find out where you can find this information on moneycontrol app.
What? You didn’t yet downloaded Moneycontrol App.
Holy shit! Firstly go and download the app. It contains each and every information regarding any stock.
Well, Let’s start with our research.
For an easy explanation, we will take an example of a great fundamental stock ~ Hindustan Media.
Basic stats of the stock.
It is the main home-screen of stock where you can get a complete short overview. It also laid down the basic ladders to continue your research further.
Let us try to apply above discussed parameters in this stock :-
- Its PE < industry PE, which shows its cheapness to some extent in its industry.
- Price to book value is 2.6 which is quite considerable.
- Market cap is far much lower which gives us a better investment opportunity.
- (Important) Earning yield ~ 9% which is quite considerable. It is calculated by dividing CMP with EPS.
Company dividend history:
Company is also distributing dividends every year and its earning retention ratio is high ~ 93%
It means that company is retaining its 93% of earning to further expansion and distributing 7% as the dividend. Plowing back of profit will be beneficial in future.
Its earning is also showing a growth trend:
- EPS (ttm) – 23.51
- 2015 – 19.19
- 2014 – 15.15
- 2013 – 11.52
- 2012 – 8.9
- 2011 – 7.3
Now let’s look at the debt to equity ratio
Its debt to equity ratio is very low. So the company is risk-free and even interest cover is very high – 18, it means the company can cover its interest expense 18 times from its existing profit.
Even its margin ratios are mind blowing, (ranging from 16 to 20%). It shows economic moat and a great margin at different level of expenses.
Most crucial ~ ROE (return on equity) :
It shows ~ How much return do shareholders are receiving?
In middle, you can see a return on net worth. It’s just an another name of return on equity.
ROE ~ approx 20% and increasing. (Hold on, I’m going to buy this share)
And its return on overall capital (aka ROCE) is ranging from 23-25. Depicts a good employment is a capital.
One more factor which influenced me a lot is that 76% of company holding is with promoters of the company. Its shows a great sign of management effectiveness and create a trust to rely on company’s future.
Last but not the least, percent margin range from 52 weeks low.
20% margin from 52 weeks low is around 240 and its current market is 262 which add some risk to the share. However, it doesn’t guarantee that stock will fall in future.
I read many books, columns, speeches, blogs, news and most importantly, my own experience to lay down this parameter before buying any stock. So it is something you can rely on.
Now a most crucial aspect: Margin of safety.
Companies current price is 262 Inr and if we look over its past performance, its price had touched 200 (lowest price in last one year).
So, even if I assume 262 as undervalued price then too its better to buy a share at 200 than 265, that’s what known as margin of safety. Less price, more margin, less risk, more profit.
“Price is what you pay and value is what you get”
You all have come over the parameters to judge a stock but the most crucial part is to design and maintain your portfolio in a balanced manner.
As I already scheduled an email (regarding designing a portfolio) to all of my blog’s subscriber so I think there’s no need to explain this step.
Ohhh! What? You’re are not subscribed to the blog?
Okay! Don’t worry. Let’s have a look at this step too.
#4) Designing your portfolio (the fun bit!)
I’ll tell you, how you can maintain your portfolio for maximum returns but first I need to tell you how to create a portfolio to track your daily performance.
I bet, you’ll enjoy the process.
I use moneycontrol app to track my portfolio and would also recommend you to use it. Here’s a step by step procedure on how you can create a portfolio with moneycontrol app.
Here we go….
- Download moneycontrol app and open it.
- You’ll come over its homepage.
- Click on the user button embedded at the right-hand upper corner.
- Then tap “My portfolio”. You’ll redirect to a new page (illustrated below).
- Now click on 3 dotted icons and then tap ‘add account’ (in case you want to open create a new portfolio) or tap ‘edit account’ (in case you want to edit your existing portfolio).
(I’m going tell you about ‘add account’)
- After tapping ‘add account’, you’ll redirect following page.
- Name your portfolio and save it.
- Next page will be………
- Now you’ve to tap on “+” icon and then choose what to want to add in your portfolio (illustrated below)
- As we are talking about stock portfolio so have a tap on the stock.
- Now fill up the details to add any particular stock in your portfolio (illustrated below)
- Then save it.
Tadda…! The stock is tracked in your newly created portfolio.
- You can also directly add stocks in your portfolio by approaching the individual stock and…….
- Above is an example is YES Bank. Tap “add to portfolio”
- All the information will directly get filled up (except one) as shown below…
- Fill up the quantity of stock you bought and save it.
Kudos…! You have completed created your own personalized portfolio.
So on the occasion of this great accomplishment, I would like to share my recently created portfolio of 3 stocks………..
You may have some strategy on which you pick stocks from the market.
- So create a shortlist of 5-6 shares based on your strategy or based on parameters demonstrated in this guide earlier.
- Lock your money.
Now it may possible that not all the stock you choose garner you satisfactory returns.
So in this case, what you’ve to do is just look over your portfolio yearly (or half yearly) and find out the stocks which are not performing well.
Then what? Again follow the steps, create a new shortlist and lock money. Now just switch off the funds from non-performing existing stocks to newly selected stocks.
In a couple of years, your portfolio will deliver you standard results. Just follow procedure year by year.