Stock Investment For Beginners – A Detail Guide [India]
Stock Investment For Beginners – A Detail Guide [India]
I generally write about fundamental
analysis of the business. I got this feedback that such
articles are less helpful for the novice. They would prefer a more basic
write-up that covers stock investment for beginners. So, I thought to give it a
try in my writing style.
Stocks trade in the stock market.
So allow me to start with a mention about Mr.Market and online trading.
In my 20s, whenever I used to
hear about the stock market, initial thoughts were not pleasant. It only
brought images of shouting, commotion, and crowd. People of my generation had
the same feelings. Right? Moreover, parents used to dislike it. The stock
market was equivalent to gambling for them. It was a negative bias for sure.
It was an age when online trading
was not available. The trading happened directly on share market floors.
Traders used to use hand gestures and shout to execute a
buy-sell order. For people like us, finding a competent trader was as
complicated.
Today, the situation has changed.
These days, stock market floors have become silent. All stocks are bought and
sold online. Individual investors can buy-sell stocks on their own, and no
third-party intervention is required.
Furthermore, individual investors
have also matured. More are investing than speculating. Investment and
speculation are different? Yes. Investing is done upon analysis for the
long-term gains. While speculating in stocks, analysis is shallow, lacking
depth.
Takeaways: First, online trading has made
buying and selling stocks easier. Second, speculating is not investing. Third,
if one wants to practice investment, the assets must be first analyzed and then
bought for the long term. Know More: How
to practice long-term investment.
Why Invest In Stocks
Good stocks have the potential to
grow fast over time. Here is an example of a listed company called Marico.
Suppose there is an investor who has held on to its shares for the last 20
years. Allow me to show the value of his investment as of today.
An investor named Pradeep bought
1000 number shares in Nov-2001. He continued to hold on to his stocks till
today, Nov-2021. So, let’s calculate the present value of his holding.
Between the YR-2001 and 2021, the
company issued bonus shares to the shareholders thrice (see the above
infographic).
[Please note that I’ve not
considered the effect of stock-split on the holding quantity as the prices are
already split-adjusted.]
So, to calculate the long-term
return for Pradeep, we must consider two factors:
- Price Growth: Marico’s share price has
grown from Rs.2.86 to Rs.552 in 20-years.
- Bonus Shares: The quantity of holding
shares for the investor grew from 1000 to 4000 numbers due to the bonus
shares issued.
Considering these two factors,
the return offered by Marico to Pradeep is a massive 39.44% per annum.
Takeaway: the price of good stocks
grows with time. If the company also offers bonus shares, it is like the icing
on the cake. But to enjoy the benefit of bonus shares, it is essential to hold
on to the stocks for a very long time (like 10-20 years). In this case, the ROI
offered by it is unmatchable from any other investment options.
Shareholders Are Owners?
A stock (or share) is a small
portion of a company. When one owns one share of a company, it is like holding
proportional ownership in that company.
This ownership is not exactly
like what Ratan Tata may enjoy over Tata Group. Shareholders have a claim on
net profits (PAT).
Example: Suppose there is a company that
has 100 shares in the market. You own one share of that company. The company
makes Rs.1,500 in net profit. Then as a shareholder, your claim will be Rs.15
(1500/100).
You may not dictate terms on how
to run the business, but the company is obliged, but not binding, to share with
you Rs.15.
Why no binding? Because it is
within the company’s rights to retain the profits instead of giving
them to shareholders (as dividends).
Takeaway: A shareholder is a proportional
owner of its company. If the shareholding is high, the person’s (or a nominee)
inclusion in the board of directors is possible. This way, the shareholder has
the option to run the company as an owner.
Stock Price and Business
Stock prices move up and down
every few seconds. This volatility makes stocks both risky and builds
value at the same time. But why do stock prices move up and down?
To understand it, we will
classify the price movements into two parts:
- Short Term change: Price movements in the
short term are due to demand and supply imbalance. When demand for a stock
is high (more buyers), the price goes up. When supply is high (more sellers),
the price falls. Between 1-day to 1-quarter, price fluctuations are mainly
random. It is either triggered by some non-financial news about
the company or by speculation. Beyond one quarter (3 months), there can be
a rationale behind the volatility. Why? Because companies publish
quarterly reports for the stock market. Price movements, within a year,
are less driven by business fundamentals and more by
market sentiments or speculative behavior of the
investors.
- Long Term change: Long-term price movements
follow a trend. If the business fundamentals are good, the stock price
will rise and vice versa. Though the quantum of price rise/fall may not
match the change in business fundamentals, at least they are relatable.
What are business fundamentals? Sales, profits, net worth, asset base,
profitability, cash flow, etc. Read: How to identify good stocks?
Takeaway: We must realize the
relationship between time and the price of a stock. Its
current price is more influenced by speculative forces when holding time is
shorter. When the holding time is high, business fundamentals drive the price.
It is the reason why experts advise buying shares of a strong company.
Finding A Strong Company
It is from here onwards that
stock investment for beginners may start to look complicated. But not to worry,
the explanation will be simple.
While buying stocks of a company,
the focus should NOT be only on price. Attention should be more on the business.
We know it is the business that ultimately influences price in the long term.
But if we are trading in stocks
for the short term, we may not care about business fundamentals. But we can
combine investing and speculating to get good results. How?
People who are pro-traders have
tools that can suggest to them when to buy and when to sell.
Moreover, these investors trade in stocks in high volumes. For them, even 1-2%
gains are enough.
But retail investors who invest
tiny amounts in a company, the volume game will not work. Here they rely more
on assured high returns, like 12% per annum for 10-Years. Read
about compound interest & its utility in investments.
How to combine investment and
speculation?
In Four Steps:
- Step #1: Buy stocks of only fundamentally strong businesses.
If implemented well, with other steps, it can substantially reduce the
risk of loss.
- Step #2: Make sure to buy them at
a fair price. Buying good stocks at a
discount can seal the deal. From this point onwards, the investors almost
have a cent percent chance of making profits.
- Step #3: When you buy stocks, do it
with the intention of long-term holding. Why? Because in the short term,
the price is volatile. If the mindset is
for long-term holding, this volatility will not matter.
- Step #4: Buy stocks by fixing incremental
milestones. Example: 10% up in 1-day. 12% up in 1-month. 15% in
3-months. 20% in 6-month. 35% up in 1-year holding. Sell the stocks at the
target prices. Alternatively, hold them for long periods.
[Suggested
Reading: Analysis of stocks in excel]
Trading In Stocks Is Advisable?
Stock investment for beginners is
about buying good stocks at a fair price and holding on to them for the long
term. So, if a trading opportunity comes, what to do? My suggestion will be, do
not trade.
We do not have the right tools available
to trade stocks. Hence timing the stock purchase will be inaccurate. Read
more about day trading.
So what to do? See the steps shown above in this article.
Use an online trading platform.
It is a refined form of investing in stocks. One can use a trading platform and
buy/sell stocks from the comfort of home. These days there are online brokers
(like ICICI Direct, Axis Direct, Sharekhan, Zerodha) who provide such
platforms. Suggested Reading: how to start investing in the share market.]
Using these trading platforms,
one can self-trade stocks. The dependency on the brokers is gone.
Agents/brokers do not execute buy/sell orders on share market floors.
Automatically the trades are
executed – online.
Following A Process
Investing in stocks has become
too easy. If you have a smartphone and an internet connection, you can start
buying stocks within minutes. But do not start so quickly. Get the process right
before buying your first stock.
The process:
#1. Know Why You Are Investing?
What is your goal of investing in stocks? If you can answer this
question, it completes the first step.
Fix a goal and its timeline.
Knowing how far it is from today is a necessary realization before investing.
One must also assign a value to it. This way, the goal will get quantified.
For beginners, if the goal is
less than 3-years away from today – preferably avoid stocks. If the goal is
further away – stocks could be a good choice.
Follow these sub-steps to
finalize the goal:
- Name It: Make sure to name your
financial goal. It can be like retirement, funds for children, marriage,
car, home purchase, etc. An example of this can be a downpayment for the
home.
- Quantify It: How much funds are
required to meet the goal? Indicate the value in your local currency. One
example is Rs.20 lakhs for the downpayment for a home loan.
- Time: The time available to meet
the goal must be known. It is the time horizon we have in hand for
investing and building the capital. One example is 5-years to accumulate
funds for the downpayment.
- Cost: How much the goal will
start costing you, starting from today. For example, investing Rs.23,000
per month in stocks will build a corpus of Rs.20 lakhs in 5-Years at 15%
per annum return.
Check the below investment
calculator to quantify your cost:
|
Corpus to be Built
(Rs.) |
|
|
Expected Return
p.a. (%) |
|
|
Time (in years) |
|
|
SIP (monthly
contribution) (Rs.) |
|
How do I fix my goals? I avoid
including goals like vacations, car purchases, etc. My preference is to invest
money either for a priority or for asset
building.
- Priority – can be like child
care, parents care, education fund, financial independence, emergency
fund, etc.
- Assets building – buying such assets
which can eventually generate streams of passive income for me.
For example, a real estate property, annuity,
dividend stocks, etc.
#2. Purchasing Stocks
Purchasing stock of strong
businesses at an undervalued price is a must. We already know this. Right? But
how to identify such companies?
There are two steps involved
here:
- 1. Fundamental Analysis: In this step, analyze the
business behind a stock. How to do it? First, create your list of shares
(only 3 to 5 nos). The best way is to keep a ready list of stocks having
a quality business. How to identify
them? By doing a fundamental analysis of its
business. I keep it in my google finance spreadsheet. Make
sure to eliminate troubled companies like Idea, Jet Airways, Kingfisher,
etc.
- 2. Price Analysis: After analyzing the
businesses and preparing a list, go for price analysis. In the list,
assign a target buy price for each stock. Now, start tracking-price of
these stocks in a google sheet. Whenever the price falls, compare it with
your target price to check if the buy time is near. To set a suitable
target price, one can also estimate its intrinsic
value.
I use my stock analysis worksheet to do a
thorough fundamental and intrinsic value estimation of my list of
companies.
Takeaway: Before buying any stock, it is
better to do as much digging as possible about its business. Reading the latest
news about the company helps to know the latest insights. I subscribe to google
alerts to get it right into my inbox. Reading about the board of directors of
the company is also good. We can also look into the website and products of the
company. Knowledge of current customers of the company will also build a
perspective.
Do Not Want To Trade in Stocks? These Are The
Alternatives
Stock trading may not be for
everyone. Hence, exploring the alternative is necessary. There are two
excellent alternative options. The first is index funds, and the second is
exchange-traded funds (ETFs).
People who are busy and cannot do
self-research can follow this approach. Start a systematic investment plan (SIPs) in
these types of mutual funds.
- Index Fund: It offers the best
investment diversification in equity-based investing. Here the investor
can earn average market returns with minimum possible volatility and risk.
But the only control point is that the investor must stay invested for the
long term (5+ years). Read about index
investing.
- ETFs: Exchange Traded Fund is a
hybrid product. It combines the benefits of stocks and mutual funds. In
India, there are three types of ETFs. Index ETF, Bank ETF, and Gold ETF
are most prevalent. The price of ETF is as volatile as stocks. Hence
prospective investors can take advantage of price volatility and trade in
ETFs. Read: About ETFs.
Suggested
Reading: Index
Funds vs. ETFs – which is a better alternative.
For a beginner, the ideal
starting point will be index funds. Once some investing experience is built,
including ETFs in the portfolio will be a good idea.Stick to ETFs for some
time. Soon you will feel that now you are ready for direct stock investing. At
this point – go for it. Read more: How to make money in the stock market.
Online
Stock Trading 101: A Beginner's Guide
Learn the Ropes If You're a
Newbie to Online Trading
Table of
Contents
- How To
Choose an Online Broker
- Why To
Research Stocks
- What
Kind of Trade Is Right for You?
- What
Will It Cost To Trade Stocks?
- How
Trading Stocks Affects Your Tax Bill
- How To
Trade Your First Stock
- Advanced
Stock Trading Strategies
- Alternatives
to Trading Stocks
- Frequently
Asked Questions (FAQs)
Want to invest in the stock market? Start by learning the basics so you
feel confident as you begin to trade.
This beginner's guide to online stock trading will give you a starting
point and walk you through the basics so you can feel confident choosing
stocks, picking a brokerage, placing a trade, and more.
How To
Choose an Online Broker
First, you need to open a brokerage
account with an online stock brokerage.
Take your time researching the reputation, fees, and reviews for
different options. You want to feel sure that you are choosing the best online
stock broker for your situation.
As you research, look at trading commission fees (many will offer free
trading), how easy the app or website is to use, and whether it provides any
research or learning tools for users.
Big firms like Fidelity, Vanguard, and Charles Schwab have both online
and app-based
trading tools. They have been around for years, have low fees, and
are well known.
There are also new platforms that specialize in small trades and
easy-to-use apps, such as Robinhood, WeBull, and SoFi. Which style and size of
brokerage is best will depend on you.
Why To Research Stocks
Once you have a brokerage, you can buy stocks. However, choosing them
can feel tricky.
If you're brand new to trading, stocks may not be the best place to
start. You may want to try exchange-traded
funds (ETFs) instead.
ETFs allow investors to buy a bundle of stocks at once. This can help if
you don't feel confident choosing one company over another.
ETFs built to replicate major stock market indices like the Dow, Nasdaq,
and S&P 500 are good places to start. They give your portfolio broad
exposure to the U.S. stock market.1
Many traders also diversify, or add variety to, their portfolio by
investing in assets other than stocks. Bonds are a popular way to diversify and
create less risk to your investments during stock market downturns.
Selecting
individual stocks is difficult. To choose well, use financial
analysis ratios to compare a company's performance to its
competitors. This can help ensure that you're adding the best stocks to your
portfolio.
What Kind of Trade Is Right for
You?
When you buy or sell a traded asset, such as a stock or ETF, there are
different types of
trade orders you can place. The two most basic types are market
orders and limit orders.
Market orders process,
or "execute," immediately. The asset you are trading goes for the
best price available at that moment.
Limit orders are a way of having greater control over the price you pay
(or receive, when selling). They won't necessarily execute right away. Instead,
you set a price at which you will buy or sell a certain asset. This gives you
greater control to get the most profit possible.
Once you own a stock, you might consider placing a trailing stop-loss sell
order. This allows you to retain the stock as long as the price is going up and
automatically sell when the price drops past a certain point.2
No order
type is necessarily better than another. By learning as many of them as
possible, you can always have the right tool for your situation.
What Will
It Cost To Trade Stocks?
One obstacle to successful stock trading is expenses. This is money you
pay just to own or trade securities. For example, one type of expense is a
commission fee. You should look for low fees when choosing a brokerage.
If you buy individual stocks through a brokerage that doesn't charge
commission fees, you might not have any expenses. However, when you start
trading ETFs, mutual funds, and other investments, then you need to understand
expense ratios.
These funds are managed by a person who is paid a percentage of the
fund's assets every year. So, if an ETF has an expense ratio of 0.1%, that
means that you will pay $0.10 per year in expenses for every $100 you invest.
You also need to consider your risk
tolerance. Imagine your investments suddenly losing 50% of their
value. Would you buy more after the crash, do nothing, or sell?
If you would buy more, you have aggressive risk tolerance. You can
afford to take more risks. If you would sell, you have conservative risk
tolerance. You should seek out relatively safe investments.
Understanding how you would react to losses is one thing, and
understanding how much you can afford to lose is another.
For example, you may have an aggressive risk tolerance but no emergency fund
to fall back on if you suddenly lose your job. In that case, you shouldn't use
your limited funds to invest in risky stocks.
How Does Trading Stocks Affect
Your Tax Bill?
It's important to understand the tax rules for
your investments, especially if you're going to actively trade stocks. The
taxes you pay on stock profits are known as "capital gains taxes."
In general, you pay more capital gains taxes when you hold a stock for
less than a year before selling. You pay less when you hold a stock for more
than a year.
This tax structure is designed to encourage long-term investing.
Selling stocks for a profit will increase your tax bill. But selling
stocks for a loss will decrease your tax bill. To prevent you from taking
advantage of this tax benefit, there's something known as the "wash sale
rule," which delays the tax implications of any profits or
losses if you re-enter the same position within 30 days.3 In other words, if you sell a
stock for a loss, then buy the same stock a week later, your loss will no
longer give you tax benefits.
The loss will be accounted for once you sell the stock again.
If
minimizing your tax bill is a primary concern, consider a retirement account
like a Roth IRA or
401(k) plan instead of a standard brokerage account.
How To
Trade Your First Stock
When you're ready to place your first trade, fund your brokerage account
by transferring money to it from a bank account. It may take time for your
funds to "settle," or become available. Some brokerages give you the
money immediately while the transfer is processing, and others wait a certain
number of says.
Once the funds have settled, log into your online account with your
brokerage. Select the stock you want to trade, pick an order type, and place
the order. After placing the order, watch to make sure it executes. If you're
using market orders, it should execute immediately.
If you're using limit orders, your order might not execute right away.
If you want the trade to happen more quickly, move your limit price closer to the
ask price (if you're buying) or the bid price (if you're selling).
Are You Ready for Advanced Stock
Trading Strategies?
Beginners should stick with simple buy and sell trades. However, once
you master those basic concepts, you can add advanced strategies to your
trader's toolbelt.
For example, trading
options exposes you to greater volatility. These are riskier
moves, allowing you to make both gains and losses more quickly.
Another advanced strategy is borrowing money from your brokerage firm to
trade stocks. This is known as "trading on
margin."
Trading on margin allows you to exponentially grow your portfolio, but
it can also quickly land you in debt. This approach to trading stocks is very
risky. You should avoid it until you feel confident in your trading abilities.
Margin traders also have the ability to short stocks.
If you short stock, you sell the stock first and then buy it later.
When the price of the shorted stock falls, you can buy it back at a
cheaper price than you sold it for. This allows you to make a profit. But if
the stock price increases, you still have to buy the stock to close their
position, and you will lose money.4
What Are Alternatives to Trading
Stocks?
Trading stocks is one way to engage in the market. But there are other
options you can try.
Mutual funds, for example, don't trade like stocks or ETFs. Instead,
they allow you to invest in many different sections of the market through a
single fund.
You can also use a robo adviser instead of trading on your own through a
brokerage. Robo advisers are
app-based investment services. They use algorithms, and the answers to basic
questions to automate investment decisions.
These are popular with beginners because they're easy to understand.
They also have relatively low fees, compared to having a traditional financial
adviser pick and choose investments for you.
When you are starting any game, or investing, or any
business it is very important for you to know what is its rule. Same with
investment also when you are about to start your intraday trade it is very much important that you should know
what are the share market trading rules. These rules will help you from booking
huge losses. So do remember them while trading.
1.
ALWAYS GO WITH REGISTERED BROKERS AND INVESTMENT ADVISOR– It is
advisable not to go for unregistered brokers or investment advisors as they do
not have the right to do so. In order to avoid fraudsters go with a registered
person only.
2.
DON’T GO WITH RUMORS – There are
many fake people moving around spreading fake news don’t listen to them. Always
believe trustable sources.
3.
CHOOSE RIGHT STOCKS – Since you are about to
invest your hard-earned money on the share you choose it is very important that
you select the right stock. Choosing wrong can end up giving you loss.
4.
ALWAYS USE STOP LOSS– It is very important to use
a stop loss. Don’t hesitate while putting stop loss on your trade. Stop-loss
always saves you from booking huge losses. So it is better o book small losses
instead of losing our whole investment.
5.
STAY ALERT– if you trades are running stay alert. Keep
yourself update with the news. Single news can turn your profit into a loss. So
stay alert.
6.
DON’T OVERTRADE– If you like trading and want
to earn money quickly don’t forget in one day you cannot become a billionaire.
So don’t over trade booking small profit daily is better than earning a big
profit in a single day.
7.
DON’T GET EMOTIONAL– don’t bring your emotions in
between trading. Trade with a mind not with the heart.
8.
NEVER BORROW MONEY FOR INVESTMENT– Investment
you make is always at risk. So never borrow money for investing in the share
market. Invest only that much amount on which you can risk.
9.
DIVERSIFICATION– never invest your whole
amount on a single script. In case you are about to book loss you don’t risk
whole investment on a single trade.
10.
DO SOME RESEARCH WORK– The script you chose in
equity or future market r the strike price you select in nifty and bank nifty
do some researches work. Don’t invest blindly. Learn about indicators and
reports.
11.
DON’T BE GREEDY– book profit and take an
exit, do not wait for big profit .book the ongoing profit doesn’t be greedy.
12.
IT IS OK TO BOOK LOSS– Don’t afraid of booking a
loss. Profit and loss booking is part of trading. So go with it. Don’t
overthink of loss. Try to focus on profit-making strategies.
Next time whenever you trade remember these share market
trading rules. these rules will minimize your loss and maximize your profit.
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