Stay away from stock tip, focus on fundamental
Every time you are chatting about stock markets during a dinner meet, a night out or while visiting a friend, invariably there will be someone offering a tip on a stock and another one willing to invest and make big money. In reality, this story usually doesn’t end well. Many have lost money on stock tips. If you want to enter the equity market, here is what you should know before investing:
Take the mutual fund route
If you don’t know anything about the stock market or have been tempted to venture into it through stock tips, don’t. If you really want to invest a part of your portfolio in equities, start with mutual funds. “Ideally, you should not enter the stock market through direct equity. Instead take the equity mutual funds route. But, if you are really interested to understanding stocks, you need to begin with getting basic education regarding stock market and companies. Relying on cheap stock tips, isn’t a good idea,” said Kiran Telang, a Mumbai-based certified financial planner.
ETFs can be an option to consider
First-time investors may not be able to do the due diligence too. “Figuring out the entire market or even crunching numbers is not possible for a new investor. You could start with committing a small amount in Exchange Traded Funds (ETFs). You need a demat account for investing in an ETF. ETFs are made up of stocks, making a particular index such as Sensex or Nifty,” said Pankaj Mathpal, managing director of Optima Money Managers. ETF simply tracks benchmark index. A minimum of one unit of the ETF can be bought and it is done in the same way as shares are bought through a broker. The returns of an ETF are usually close to that of the corresponding index.
Invest in companies you understand and use
Once you get the hang of ETF investing, even before you start crunching numbers for individual stocks and read technical charts, use your common sense. Firstly, understand the companies that you want to invest in. “As a lay investor who is just entering stock market, don’t buy stocks you don’t understand. Buy a company you understand. For instance, as a lay investor you will understand a certain business a whole lot better than other sectors. Look around in the real world and some businesses are used by you consistently for years,” said Mathpal. Choose to understand that particular sector well. As someone who is just entering the market, it makes sense for you to buy a stock you know a thing or two about rather than investing is some random company which you have never heard of before.
SIP it up
Just like you have Systematic Investment Plan (SIP) in mutual funds, many brokers now give you the option of investing in direct equity through SIP. “Say you have ₹5,000 a month to invest in equity. Choose three stocks, and set a date with the broker to buy one share each of those three companies a particular date a month. Unlike mutual fund SIP, where the amount is fixed, when it comes to direct equity, the amount can differ. The SIP value will change every month on a particular day, based on how the stock or the market are doing that day. Some months it could be ₹4,800, on other months is could be ₹5,200,” said Mathpal. Remember investing into equity funds using a disciplined and long-term approach.
If taming the stock market was so easy, everyone would do it. Losing money in the market is real, and facing all the volatility of the stock market is part of the deal. While dealing with direct equity investing, besides looking at the fundamentals of the stock, the number crunching and price-to-earnings ratio, you also need to consider how you emotionally handle your investments. It’s a tough game, as you will be competing with experts.
What should be the investment amount for beginners?
Common sense says there’s no point in investing your whole monthly investable surplus towards direct equity. Consider yourself as a student of stock market and invest only a small part of your investable corpus towards direct equity. “Consider that amount as your education fee – something you are willing to lose in the market without being badly impacted,” said Telang. Chose an amount you are willing to lose without breaking your mind while learning the reins. Enter small and be patient while you learn the tricks of the trade. The basic of stock market isn’t about numbers, rather about common-sense approach. Once you’ve mastered that you can step up.
5 things you must know while investing in direct stock
Focus on core business: Look for companies which has a track record of consistent growth especially from core business
Understand the valuation: Always have a clear understanding of the valuation of a company. Without looking at valuation, you should not venture into it.
Shareholders should make money: If the stock is not giving benefits to its shareholder than you may want to check why and reconsider the plan.
Management is the key: The management of the company is the backbone and you want to be sure that it will work in the interest of you as a shareholder.
Too much debt can be bad: Track how much debt the company has on its books. If the company has too much debt, you may want to evaluate the stock.