How to Start Investing (BseNse)

How to start investing in Stock Markets?

Prepare yourself
I have seen most of the first time investors losing big money in the stock markets and you would come across a number of such investors with terrible experience in stock markets that they hate to even discuss about any shares and feeling very secure with their money being invested in Bank Fixed deposits, traditional insurance plans and Government bonds with a return of about 8 percent a year. They had a sour experience because they had not prepared themselves for investing in stock markets, they simply saw some other fellow making huge money on some news driven stock and next time put a huge sum on his advice or saw an expert on a news channel strongly recommending a stock and the markets turned otherwise. Such people do not dare to take another chance and believe that perhaps they are not made for it and resolve not to even look at it during rest of their lives. The experience might have been different if they would have spent some time researching and had some patience before making a first time entry. Some basic steps for the first time investors are listed hereunder which will be useful to make a successful entry into the stock markets and for those as well who had a terrible first time experience.

Buy stocks while they are moving up; don’t try to catch a falling knife.

An old saying, but true. The most important thing in trading is to trade with the trend. A stock should be bought while it is in an uptrend and is moving up. A number of investors think that is has already moved so much how far it can go and ignore the stock thinking that they should have bought it a month ago. But actually there are more chances of a momentum stock’s climbing higher than those which have yet not started moving up. Last year sugar stocks fell more than 50 percent and a number of investors thought that they have already halved, how far can they fall so it becomes a good buy, but the fundamentals did not suggest buying sugar stocks and now they have went down to as low as a third of what they were a year ago. There are oversold situations in the markets and there is a bottom to every fall, but it is impossible to predict a bottom. We have to wait till the downtrend reverses and the stock starts rebounding, there you have to catch it and ride the momentum. Let the knife fall, vibrate for some time and then you may pick it up; there are less chances of injuring yourself.

2. Do not lose patience and let the stock come to your target.

It happens to most of investors that when they want to sell, the stock does not go up and when they have to buy, the stock does not come down. The fault lies not in the stock but in ourselves that we become impatient and try to initiate a trade without waiting, it is very difficult to sit on cash. When you have chosen a stock for buying, decide a price where you are comfortable and wait for some time, let the stock come to your price and you should not be chasing the stock, and bear it in your mind that if the stock does not come to your target, you do not lose anything. But the same is not true while selling, if you get decent profits, sell the stock, don’t expect a fortune from your pick and expect only reasonable returns. Once you have converted into cash some other opportunity will come your way.

3. Invest in blue chips, market leaders and aggressive companies

Don’t buy a stock just because it is going cheap. Look at the prospects of the company, you would see that in the long run blue chips and market leaders would not disappoint you though they cannot be expected to be multi baggers but a decent return is always expected. You would see Infosys, Reliance Industries, ICICI Bank, Bharti, Bajaj Auto, Maruti and Unitech in the portfolios of most of the Mutual funds. These stocks are the firsts to recover from any corrections or recessions. These are the first preferences of foreign investors, Mutual Funds and traders therefore they attract a lot of buying interest whenever they fall down to a bargain price.

4. Play both sides of markets.

Most of the retail investors are bulls by nature they only buy stocks and do not short the markets or individual stocks. There is an inherent fear in short selling than in going long but truly speaking there are equal chances of markets going up or down so why not pick the trend and go with the trend. When there is panic in the markets or there is any negative news on which the markets are bound to fall, then you must be on the short side, of course with stop losses as in case of going long. Play both sides of the markets if you want to completely enjoy the game. Don’t be a batsman or a bowler, be an all rounder.

5. Opportunities always exist in equity markets.

Believe in the fact that opportunities always exist in equity markets and lament not for a missed one, there are ample waiting to be discovered. Have an eye for watch and you will find another gem at a handsome price, you don’t need to make all right calls to make money in stock markets, rather you need to keep your senses with you and play intelligently. No one knows the future; he who plays smartly will win the game.

6. Check fundamentals before buying.

You must check fundaments and do your own analysis before buying any stock. A street call or an expert’s call should not be followed blindly. In these markets everyone can be wrong or right, you must satisfy yourself before putting your money. Have tips from everywhere, weigh them well in your own way and decide yourself which stocks to pick and when to pick.

7. Strictly follow stop losses.

Everyone knows this, it is taught everywhere but we still get carried away with our emotions, yes, we tend to fall in love with our stocks, it feels painful to part with them and that is why when it breaches our stop loss we tend to give it one more chance to make a comeback, but it doesn’t and keeps going with the trend, deepening our losses. It takes courage to accept losses but it should be part of the game, when you had decided to invest in stock markets you had agreed to accept both profits and losses, didn’t you? Now by adhering to your stop losses you are trying to restrict your losses and that is a wise thing to do, so we strictly need to put stop losses to our trades and stand by them to maximize profits.

When it comes to make a long term call, I think 9 out of 10 analysts will be right or may be 10 out of 10, and even an experienced investor who reads well, will be able to make a right call but when it comes to making a short term call it becomes an arduous job for the most learnt researchers. There are so many factors which contribute to the movement of prices that it becomes very difficult to predict their trend. However an insight of all major events, news flows, financial information and basics of the company gives us a view whether the price of the stock is justified or not, is it worth owning the stock at the given price or the stock is already overvalued. It works well if you make a prediction for the long term, but the short term movements are always governed by macroeconomic factors, general trends and Government announcements which are not predictable, therefore it is easy to make a long term call by using fundamental analysis. And that is why most of the mutual funds take long term calls considering them to be safe. For example you find a stock which is going very cheap and fundamentals suggest buying the stock but suddenly some negative factor triggers in US and there is a sell off in Global markets and our markets are also not spared and that stock also could not swim against the stream and is hammered down and a good stock gives you a negative return in the short term in spite of being a value buying. But if you have bought if with a long term view and the company is fundamentally sound the stock will rebound when the crisis is over and will give you a good return in the long term. The whole discussion was to bring home the fact that if you are novice to this market make your first call a long term call, there are more chances of making money. After some experience you can become a swing trader or a day trader but first be an investor.

Economy analysis

The first step towards picking stocks is to analyze macro economic factors. After having a look at the macro economic factors you will have a feel about the overall future outlook of the markets. The GDP numbers, inflation, exchange rates, interest rates, Foreign Direct Investments, industrial growth and a forecast given by the Government on expected GDP and industrial growth numbers are to be tracked. A strong GDP growth and industrial numbers indicate a strong economic growth and a growing Foreign Direct Investments shows the potential of companies operating in India. An increase in inflation might trigger the urgency to raise interest rates and increasing interest rates will slow down credit growth and demand in the country and thereby resulting in lower profits by the companies and falling interest rates have an opposite effect and will have a direct impact on the Automobile and real estate companies, lower interest rates will increase profits of these companies. An appreciating currency will attract more foreign investments and carry trades giving boost to the markets. A combined effect of all the above factors gives us an indication of a strong or weak future outlook. When every thing is going well and the economy is growing there are more chances of stock markets going up and fundamentally strong stocks will rally with the markets.

Industry analysis

It is necessary to have a look at the industry as whole to which your pick belongs. If the industry or the sector as a whole is in a downtrend then there will be a downward pressure on your pick being in that reeling industry. For example Sugar Industry has been in a downtrend for last one year and the valuations are looking very cheap still the stocks have underperformed if compared with the broad indices, most of the sugar stocks have given negative returns whereas the markets have grown sharply in the last one year, the economy has also been booming. Similarly metal stocks, Tea stocks, Oil stocks, Textile stocks and other sector stocks follow sectoral movements which depends on various factors like international commodity prices, currency prices, crude prices and overall demand and supply situation in that sector. Therefore the whole industry should be analyzed before picking your favorite stock.

Company analysis

The last step is to analyze the company you are going to invest in. For this purpose you will need financial statements of the company for past few years and the recent news flows about the company. This information can be taken from any brokerage house website and such information is also available at the websites of stock exchanges. The first thing to watch is the consistency in growth of profits and turnover, the turnover and profits should be growing consistently from quarter to quarter and from year to year, this would ensure that the company you are going to invest in will have growth prospects which should be reflected in its stock price.

EPS and PE ratio

After having a look at the profitability and its consistency, you have to check whether the current market price of the stock is justified or not. Two basic ratios are used to find a correlation between the market price of the stock and the profitability of the company. EPS or earnings per share are the profit per share of the company. It can be calculated by dividing the total profits of the company by total number of outstanding shares. For example a company makes a Net profit of Rs. 10, 00, 00,000/- and the total number of shares are 53, 00,000 then the EPS of the company is Rs. 18.86. The PE ratio or the price to earnings ratio is found out by dividing the Market price of the share by the EPS arrived at above. In the above example if the stock price is Rs. 260 then the PE ratio is 13.78. Every industry has different PE ratios and it also varies from stock to stock, the more reputed and large sized companies enjoy larger PE ratios as compared to small companies. These ratios should be compared to the peer group companies, for example two companies are in the same sector and the size is also not very different then the stock with the lower PE ratio is cheaper than the other and has less chances of correcting in a falling market.

In my previous article in this series we had learnt to prepare ourselves mentally to get into the markets and learnt some basic exercise before actually jumping into the markets. In this article we shall try to cover practical aspects of investing like opening of various accounts and understanding basic concepts of trading.

Opening a Demate account

The first step towards investing in stock markets is to open a Demate account. A Demate account is opened with a depository participant, which may be a stock broker, a Bank or a financial intermediary. To open a Demate account you need to fill up a securities account opening form together with an agreement with the Depository Participant. Following documents should be enclosed with the form.
Passport size colors photograph
a copy of the PAN card.
An address proof (Copy of Passport, Driving License, Ration card, Election identity card, etc)
Proof of Bank account (a cancelled cheque or bank statement can be given)
A passport size color photograph of the nominee (if appointed)

Once these documents are submitted together with duly filled up account opening form, your demat account will be opened in a week’s time and you will receive a booklet containing instruction slips and your beneficiary account number. A DP ID number will also be printed on the delivery instruction booklet which is the unique identity number of your Depository Participant. These delivery instruction slips are used to transfer shares from your account to another account. You will need these when you sell shares through your broker or when you want to transfer shares to some other person.

Charges for opening a Demate account

There are two types of charges on your Demate account. One, annual maintenance charges and two, transaction based charges. Annual charges range from Rs. 100 per annum to Rs. 500 per annum for most of the Depository Participants and transaction charges vary from 0.01 percent to 0.05 percent of the transaction value, some Depository Participants, mostly brokers, charge flat transaction charges like Rs. 10 or Rs. 30 per transaction slip irrespective of the value of trade. Some brokers have come out with a lifetime free Demate account where you do not need to pay for annual account maintenance charges.

How to choose the right Depository Participant?

As far as cost aspect is concerned a Demate account with a broker is much more economical than a Demate account with a bank. For example, you sell 1000 shares at the rate of Rs. 500 per share then, in case of your account with a broker, the broking house would charge you Rs. 25 for executing your instruction slip and in case of a Bank they may charge you Rs. 200 (i.e.0.04 percent of transaction value of Rs. 5,00,000/-). One more benefit of having a Demate account with your broker is that you may authorize your broker through a Power of Attorney to automatically debit your Demate account with him whenever you sell stocks from your holdings in that account, this saves you from the hassles of filling up and depositing delivery instruction slips with the DP in a very short time. I would recommend having a Demate account with the same broker where you have a trading account. Still, if you feel more secure with a bank to have your Demate account then it should be with a bank which is most convenient when it comes to deposit delivery instruction slips.

Choosing a stock broker and opening a trading account

The regular traders and experienced investors look at the lowest brokerage and highest margin while choosing a stock broker. But for the first time investors, brokerage rates should be secondary and they should look at the research and analysis provided by the broker. A good brokerage has a system whereby you get an access to their research team and research reports released by them and a relationship manager is always accessible for your general queries and help. The brokerage should not be a deciding factor as initially your volume will not be very high and once you get expertise in trading, you can shift to a low brokerage broking house. Opening of trading account is almost similar to opening of a Demate account. You will need to fill up an account opening form along with agreement with the Broker together with the following documents.

Passport size colors photograph
a copy of the PAN card.
An address proof (copy of Passport, Driving License, Ration card, Election identity card, etc.)
Proof of Bank account (a cancelled cheque or bank statement can be given)
Proof of demat account
A passport size color photograph of the nominee (if appointed)

Internet trading

Internet trading is getting popular for the convenience of trading stock markets without going anywhere. ICICI Direct, Sharekhan and many other brokerages are providing services of internet trading through their websites. In an internet trading account your Bank account, your demat account and your trading account are linked with one another and you can transfer funds from your bank account and buy shares through your online trading account and you can check the status of your holdings online in your demat account and when you sell the shares through your trading account your demat account is debited by the same quantity and the amount realized is shown as a credit balance in your trading account which can be transferred into your bank account or can be used for further buying.

However, there are certain disadvantages of having an internet trading account.
The online trading companies would not give you any margin and you will have to transfer entire amount before buying any stock whereas in offline trading brokers generally keep only 20 percent margin and rest can be paid when you buy the shares. The brokerage charged by the internet trading websites is generally higher than that charged by the brokers offering offline trading. The biggest disadvantage is the time lag of prices, you would not get live quotes in an online trading account and in stock markets even seconds would matter, you would want to have the live prices to initiate a trade. It depends on the speed of the ISP you are using and the type of connection and if your connection is slow the time lag could range from 2 to 5 minutes.

Now after opening demat and trading accounts you are ready to do your first trade. Do your own research, have a word of advice from your broker and tread forward into the world of financial markets. Happy investing

Get a feel of the stock markets.
Before entering the markets it’s always recommended to spend some time understanding them. When you go for shopping you spend some time visiting shops in the market to have a look at various designs and prices and then decide which merchandise you want to buy, similarly before buying stocks you must visit the stock markets, understand them, have a look at various stocks available and then pick one of your choices. Well it’s not as easy as writing it or recommending to someone; actually it’s a tough job even for those who have spent a long time in markets. But I would still maintain that the research done by you is the best.

Spend some time with business newspapers and business news channels.
Start reading the daily business papers, particularly the stock market pages and try to correlate the news on companies to the movement in their stock prices. For example, recent news that Suzlon buys control in RE power pulls the price of Suzlon up by more than 7 percent in a day and sound quarterly results and announcement of bonus shares moved the stock price of NIIT Technologies more than 12 percent in a day similarly a poor show of quarterly results by Punjab National Bank saw its stock price fall by more than 4 percent in a day. In a few days your eyes will automatically be able to catch the price sensitive news in the papers. The next stage is to remain updated by watching Business channels as the news you get in newspapers in the morning might have been broken by the channels on the previous day, and in this world of fast moving information you need to get the news as it is broken. It may not be possible for you to watch TV during office hours, and then you may browse through some good websites to keep yourself updated.

Have patience, do not panic to invest.
Once you allocate some money for investing in stock markets, it becomes very difficult to control your nerves and sit on cash till you discover a dream stock at a dream price. Your first entry should be after a lot of research and it may take a few months waiting for the right opportunity but your first stock should not let you repent on your decision. Consider all factors, the macro economic factors, the trend of the markets and the overall global scenario, the cycles, the technical of the markets, fundamentals and technical of your target stock to make your first move.

Do your own research, don’t follow street calls blindly.
Try to do your own research before buying a stock. You may take a tip from a friend or an expert, but research yourself before making an investment and if your own research justifies the decision then go for it and if you think otherwise or you feel uncomfortable with the bargain then don’t go for it. There is no dearth of opportunities in the markets wait for the next one because in these markets sometimes not making a loss is also a profit.

Create a paper portfolio.
Now when you feel ready to kick off, its time to test your skills I know we all hate this, still it is worth being honest with yourself. Make an excel sheet on your PC and create a portfolio based on the knowledge you have gained including well analyzed tips from your friends and experts and see the performance of your portfolio over a period of time. You will be able to realize when you can make a real portfolio.

Always invest in stock markets with the surplus money.
Last and most important advice is to make investments in stock markets with the surplus money. If you are able to set aside an amount after incurring all routine expenses, paying your installments, premiums for life and health insurance and the EMI of your house, then it can be dedicated to the stock markets. If you have yet not bought a house, I would recommend you to do that first before entering the stock markets. And never take a loan for investing in stock markets, whatever justification your calculations may give.

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