Beginner Stock Buying Guide!
How to Choose Shares to Buy in India: A Beginner’s Guide: So, you’re interested in investing in the stock market and want to expand your money. You’ve read a few investment blogs and financial websites, and you’ve signed up for stock tips and broker recommendations. You are, nevertheless, hesitant to take the following move.
Do you know that over 90% of those who invest blindly in any stock lose money in the stock market? Because they do not perform their homework first, the majority of them lose money. They largely rely on their brokers/friends for stock recommendations in the Indian stock market. On the other hand, if you want to buy shares in India that will give you consistent returns, you’ve come to the perfect location.
In this essay, I’ll show you how to choose stocks to buy in India in eight simple steps. You can select a stock to invest in the Indian stock market by following this eight-step stock research procedure to avoid losses and make consistent profits. As a result, stay with me for the next 10-15 minutes to uncover the secret of how to buy Indian shares for strong long-term profits.
Beginner Stock Buying Guide
How Do I Choose Stocks to Buy in India?
The following are the eight fundamental steps to selecting winning stocks to invest in the Indian stock market.
1. Does the company has Good Fundamentals?
There is a 2-minute drill to locate a fundamentally strong company to answer this issue. You may use this drill to filter the financially sound companies so you can look into them further. There’s little use in learning more about a company’s products/services, rivals, prospects, and so on if it’s not fundamentally solid.
Only when you’ve confirmed that the company has a good track record and is worth investing in can you proceed to the next steps. You’ll need to look into the company’s finances for this 2-minute drill. Here are eight financial ratios and their trends to pay attention to in this step:
-Earnings Per Share (EPS) – has been rising steadily for the past five years.
-Price to Earnings Ratio (PE) – Lower than the industry average and competitors.
-Price to Book Ratio (PBV) – Lower than the industry average and competitors.
-Debt to Equity Ratio – Should be less than one (ideally debt0.5 or zero).
-Return on Equity (ROE) – It should be higher than 15%. (Last 3 Yrs Avg)
-Price to Sales Ratio (P/S) – A lower value is desirable. -Current Ratio – A value greater than one is preferred.
-Dividend– has been steadily increasing for the past five years.
These financial ratios, on the other hand, provide information regarding prior performance. You can’t predict whether the company will perform similar or better in the future based solely on previous performance. As a result, when analyzing a stock to buy on the Indian stock market, you must also consider other essential considerations. These aspects will be covered in the following steps.
2. Are you familiar with the company’s products and services?
After you’ve filtered the companies based on their financial basics, you’ll need to look at their business. Learn about the business model and the company’s products and services. The business must be simple to comprehend.
You might wonder why knowing the company is so crucial. Let’s look at an example to help us understand. Assume you must select a classmate for whom you will be responsible for 36 months of spending. In exchange, he/she will give you a quarter of their future wages for the rest of their lives. Who will you pick?
When making your decision, keep in mind that you want to pick the one with the best chance of earning a lot of money in the future. Will you also pick a guy or lady at random that you don’t know anything about? You have no means of knowing how much that person will make in the future because you don’t know them. Stocks are the same way. You can easily make an informed decision whether to buy, hold, or sell the stock at any moment if you understand the stock. As a result, only invest in firms that you understand.
There are a few companies that everyone is familiar with and understands. Every product has a firm behind it, from toothpaste, soaps, towels, t-shirts, jeans, and shoes to bikes, vehicles, airplanes, and banks. Invest in such businesses. Do not invest in ‘ABC Chemicals’ stock without first learning about the company’s products.
3. In 15-20 years, will people still be using this product/service?
The next step is to inquire about the company’s prospects. Always go with a corporation that has a long history. Such businesses have tremendous growth potential, and the power of compounding applies to them. Investing in companies with a short lifespan is not a good idea.
Do you believe people will still be using soap in 20 years, for example? ‘Yes,’ is the answer. It’s been there for almost a century and will undoubtedly remain. The scent may change, but the soap will remain the same. Let’s look at another case. What are your thoughts on pen drives? Do you believe that people will still use pen drives in 20 years? The answer may be no. Overall, only invest in a stock that will last for the next 15-20 years in the Indian stock market.
4. Is there a MOAT (or Low-Cost Durable Competitive Advantage) at the company?
Mr. Warren Buffet popularized the ‘MOAT’ concept. A moat is a deep, broad ditch that surrounds a castle, fort, or town and is usually filled with water to protect it from attack. Some equities are surrounded by a similar moat. That is why it is quite difficult for its competitors to defeat them in their industry.
Consider Maggi (NESTLE)! Maggi has acquired such a household word in India that it is now regarded as a synonym for Noodles. Colgate, the toothpaste manufacturer, is another example. People simply want to buy Colgate toothpaste because this corporation dominates its industry. Similarly, Maruti Suzuki has carved out a niche for itself in the passenger car market. For decades, Maruti Suzuki has dominated the Indian automobile market with a market share of more than 50%.
Additionally, while choosing an ‘unbreathable moat,’ search for companies with a high switching cost. Banks and IT firms, for example. How often do consumers switch bank accounts simply because a competitor offers a 0.1 percent higher interest rate? Other Indian corporations with large moats include Coal India, ITC, IRCTC, and others.
5. What does the company do differently than its competitors?
Find the company’s unique selling point. Find out what this business is doing that its competitors aren’t.
Let us look at the Indian automobile industry to gain a better understanding. In India, there are numerous automotive manufacturers. When it comes to passenger vehicles (cars and SUVs), however, Maruti Suzuki is the market leader in India. Tata Motors, Hyundai, Honda, Ford, and other Indian and international competitors compete against Maruti in this area. They have not, however, been able to breach the Maruti’s moat.
Maruti Suzuki is a market leader because of its low cost of entry and readily available service locations. The majority of Maruti’s competitors are unable to match its selling price. Maruti’s service centers can also be found on every corner. Even in small cities, getting a Maruti automobile serviced is really simple and easy, and at a low cost. Attempt to get your ‘FORD’ car serviced, on the other hand. There are very few genuine Ford service centers in your area. That is why Maruti automobiles are so popular in India. As a result, Maruti Suzuki can regularly expand sales while also providing high returns to its stockholders.
Before you choose a stock to invest in the Indian stock market, look into what the company is doing that its competitors aren’t. There will be many companies and competitors whether you are investing in a banking stock or Tyres.
6. Is there a significant amount of debt owed by the company?
A company’s large debts are analogous to a large hole in the boat. If the boat’s hole isn’t filled soon, it won’t be able to cross the vast sea and will almost certainly sink in the middle.
Read the balance sheet of a stock before investing in the Indian stock market to see what debts it has on the liabilities side. Investing in companies with large debts is a bad idea. Additionally, look for non-performing assets (NPAs) while investing in banking organizations (NPA). Avoid banks with large nonperforming assets (NPAs).
7. Is the management of the company efficient and qualified?
This is one of the most important questions to consider before investing in the Indian stock market. The company’s soul is its management. The organization can reach new heights with good management. Bad management, on the other hand, might lead to the company’s demise.
It is critical to conduct thorough research on the management of the firm in which you intend to invest in the Indian stock market. First, conduct some research to determine who is in charge of the company. You should know who the company’s CEO, CFO, MD, and CIO are, as well as their qualifications and previous experience. Following that, below are a few elements to consider while evaluating the company’s efficiency:
Strategy and objectives
Examine the company’s Vision, Mission, and Values statements. Together, the company’s mission and vision guide strategy development, help shareholders understand the company’s purpose and inform the goals and objectives set to determine whether the plan is on track. These defined future statements for the company can assist an investor in determining whether or not to invest in a stock on the Indian stock market.
Management’s tenure length
This can aid in determining the company’s management’s stability. Long-term senior management combined with sustained corporate growth is a positive sign. However, when the previous management was not functioning well enough, a change in management can be seen as an effective signal. Nonetheless, in a constantly rising company, long-term strong management is an indication of a healthy organization.
The company’s promoters have the most up-to-date information on the company’s performance. Management and top officials have a good understanding of the firm’s future prospects, and they are usually correct if they anticipate the company will outperform in the future. As a result, promoter purchases and share buybacks are signals that the company’s owners believe in its future prospects, and it’s a solid stock to invest in on the Indian stock market.
Furthermore, the opposite scenario, in which the promoters or CEO sell the stock, is a separate action that cannot be interpreted as a negative indication. We cannot assess the company’s future prospects solely based on the promoters’ occasional sales of a small amount of their equity. Perhaps the promoters require funds to launch a new business, purchase a new home, or take a trip. Everyone, including founders, has the right to sell stocks when they are most needed.
In short, promoter purchases and share repurchases are signs of a strong company. However, we cannot assess the company’s prospect-based oasis of the promoter’s limited stock sales. Please note that if the promoters are selling a large number of stocks without stating why this is something that should be looked into further.
Benefits and Compensations for Employees and Workers
If the company provides good benefits to its employees and employees, this is also a sign of successful management. The performance of a company’s personnel and employees has a significant impact on its results. Happy employees are more likely to deliver their utmost effort.
If, on the other hand, there are frequent strikes or rising worker union demands, it shows that management is unable to meet the needs of its workers and employees. Such incidents are a red flag for the company’s investors.
Ratios of financial assets to liabilities ROE and ROCE
A few financial ratios can also be used to assess management efficiency. The strongest instruments for judging management performance and the consequent potential for future value creation are Return on Equity (ROE) and Return on Capital Employed (ROCE).
The return on equity (ROE) is the percentage of a company’s net income that is returned to shareholders as a value. This method provides an alternative measure of a firm’s profitability to investors and analysts, and it assesses the efficiency with which a company earns a profit utilizing the capital invested by shareholders.
The fundamental metric for determining how effectively a corporation uses all available capital to generate new profits is Return on Capital Employed (ROCE).
A high and consistent ROE and ROCE over the last few years is regarded as an indication of sound management. As a general rule, only invest in companies that have had an ROE and ROCE of at least 15% for the previous five years.
This is the last but most significant factor to consider while evaluating management. The company’s growth is dependent on the management’s integrity. It is the responsibility of management to be ‘fair’ and to provide quarterly and annual results to shareholders honestly and without manipulation.
In the same manner that management takes credit for the company’s strong achievements, management should come out in times of poor performance to explain the reasons for the company’s poor performance to its shareholders. Good management ensures that the organization’s transparency is maintained at all times.
8. Is the company frequently in the news and overly well-known?
People’s feelings are reflected in the stock market. Overly popular stocks that are frequently in the news have an impact on the public’s expectations and decisions. The media’s excitement has the potential to inflate these stocks. People expect bigger outcomes from such companies, thus their stock values may fall even if they provide outstanding profits.
As a result, try to avoid investing in such companies for quick profits. The hot stocks are more vulnerable to market volatility, while the dull stocks offer the best returns.
A Few More Quick Points
Apart from the eight stock-picking tips listed above, here are a few more to consider when choosing a stock to invest in on the Indian stock market:
1. Being cheap isn’t necessarily a good thing, and being costly isn’t always a bad thing.
When investing in growth businesses, it’s appropriate to buy stocks with a high PE ratio on occasion. Some growth stocks have enormous long-term potential and can provide multiple-time returns. Furthermore, when choosing a cheap stock, you should look into why the stock is undervalued. Many businesses sell for a low price because they don’t see much future growth.
2. For Better Returns, Invest in Mid-Cap Companies
The best returns can be found in mid-cap enterprises. In the long run, these companies have the potential to grow into large-cap companies. They have a strong growth rate when compared to large caps that have already achieved saturation, and multiple-time returns are quite uncommon.
Furthermore, mid-cap enterprises have sufficient resources to avoid debt and enjoy a long life. A good growth mid-cap stock can quickly become a multi-bagger or a stock that returns many times its initial investment.
3. Past performance is no guarantee of future success.
When choosing a stock to invest in the Indian stock market, don’t rely just on financial data. These reports detail the companies’ previous performance. Future growth, on the other hand, is dependent on a variety of factors such as management, competitors, industry, economy, and so on. Before investing, consider both the quantitative and qualitative characteristics of the company.