Introduction
Many people know a little about the stock market from books or videos. But they find it hard to actually start investing. Even if they learn a lot, taking the first step is scary. This is because they’re afraid of losing their money, especially when they’re just starting out.
This explains things using normal words. It shows how knowing about investing is different from actually investing. It also touches on the fear of losing money that often holds people back.
Correct Thought Process
When you go for picking up your first stock of any company, believe that you are investing in that business, rather than just buying a stock. Now here’s a simple question. When you start your own business, do you expect it to grow and give you huge profits in a week or a month?
Absolute no right?
So keep this simple mindset and give it some time to give you good results.
Now if you have given it a thought and built a correct mindset, let’s select your first stock!
Analysis
Pick any random stock according to you. Having done that, we move towards it’s analysis.
Industry analysis
Look at how much Indian families buy the company’s products each year. Compare this to how much American families buy. If American families buy a lot more (like 10 times more) in a year, it’s likely that Indian families will start buying more of these products in the future.
It thus becomes a good company to invest in. There is no such parameter as 10 times. It could be any multiple.This analysis is important because the Indian market follows the US market.
Company analysis
Here comes the most important yet not so difficult part. This is what you have heard as the fundamental analysis, i.e understanding the financial statements of the company.
Fundamental Analysis
Open screener / tickertape / moneycontrol and look at these following ratios:
Sales- If the sales of the company is growing over the years, it’s a good company to invest in.
Operating profit Margin- If the operating profit of the company is growing more than it is falling over the years, it’s a good company to invest in.
Net Profitability- If the Net profitability of the company is growing more than it is falling over the years, it’s a good company to invest in.
Debt: The company should own more than it owes. What it owns (assets) should be bigger than what it owes (debts). Also, the things it owns should grow over time.
Cash Flows of the company should be good and it’s better off if the cash flows are increasing over the years.
ROE/ROCE- ROE is return on equity and ROCE is return on capital employed. Both can be used interchangeably. That’s how much percentage of return does the company provide you annually? Never keep a benchmark lower than 15%. If you are making an effort to analyze the financials by investing your time, you can’t settle for less.
Promoter’s holding – Now, if the promoter keeps buying more shares of their own company, it basically means they think their company is doing great.
After doing what’s stated above, you will be left with a very few companies out of the bulk of companies listed in the stock market.
Last thing- Check out the company’s Annual Report on screener. It’s like the company’s yearly story. It tells you what they do, what they want to do, and where they’re heading.
Reading this stuff makes you kinda special. Why? Because when people panic about stocks, you’ll actually know what’s going on with the company.