LEGAL DOCUMENTS ONE NEEDS TO KEEP
In order to be able to invest in share market in India, the following procedures need to be followed.
Get a PAN or Aadhar card
PAN card or an Aadhar card is a mandatory requirement for investing in India. It is required for KYC (know your client) procedure while opening an account with the market regulator, the Securities and Exchange Board of India (Sebi). Besides this, the government has mandated six-month bank statement along with a cancelled cheque, under the new rules to open a demat account.
Get a broker
A person cannot go directly to the stock market to buy or sell shares. Buying and selling of stocks has to be done through brokers. They are individuals, companies or agencies registered with and authorised by Sebi to trade on the stock exchanges. Brokers will charge a brokerage fee or brokerage for the assistance they provide.
Get a demat account
Once you have a broker, the next step is to open a demat and trading account. This account will hold the stocks that you have purchased and will reflect them in your name. Shares cannot be held in physical form and they form part of the dematerialised or demat account.
Buying and Selling
In order to buy or sell shares, one needs to inform the broker the quantity to be bought or sold along with the price at which you wish to carry out the transaction. While investing in the share market, these are the ways to invest:
1. Understand your investment requirement and take decisions accordingly.
2. Decide your goal and plan the investment strategy accordingly. Find out the stocks that are likely to align with your investment objectives.
3. Enter the market at the right time. Try and buy the share at its lowest cost especially when the market is weak and sell when it rallies. This would yield higher returns.
4. While trading you should communicate the requirements to your broker. Ensure that the brokerdoes accordingly and cross-check to avoid any errors.
5. Monitor your portfolio regularly. Instead of keeping all eggs in one basket, have the best possible mix of stocks. It helps to avoid unnecessary risk.
With online netbanking, you can carry out transactions yourselves for buying and selling shares but you need to have a demat account with a Bank.
TIPS TO CONSIDER WHILE INVESTING
The lure of big money has always thrown investors into the lap of stock markets. However, making money in equities is not easy. It not only requires oodles of patience and discipline, but also a great deal of research and a sound understanding of the market, among others.
Added to this is the fact that stock market volatility in the last few years has left investors in a state of confusion. They are in a dilemma whether to invest, hold or sell in such a scenario.
Although no sure-shot formula has yet been discovered for success in stock markets, here are some golden rules which, if followed prudently, may increase your chances of getting a good return:
- Avoid the herd mentality
The typical buyer’s decision is usually heavily influenced by the actions of his acquaintances, neighbours or relatives. Thus, if everybody around is investing in a particular stock, the tendency for potential investors is to do the same. But this strategy is bound to backfire in the long run.
No need to say that you should always avoid having the herd mentality if you don’t want to lose your hard-earned money in stock markets. The world’s greatest investor Warren Buffett was surely not wrong when he said, “Be fearful when others are greedy, and be greedy when others are fearful!”
2. Take informed decision
Proper research should always be undertaken before investing in stocks. But that is rarely done. Investors generally go by the name of a company or the industry they belong to. This is, however, not the right way of putting one’s money into the stock market.
3. Invest in business you understand
Never invest in a stock. Invest in a business instead. And invest in a business you understand. In other words, before investing in a company, you should know what business the company is in.
4. Don’t try to time the market
One thing that even Warren Buffett doesn’t do is to try to time the stock market, although he does have a very strong view on the price levels appropriate to individual shares. A majority of investors, however, do just the opposite, something that financial planners have always been warning them to avoid, and thus lose their hard-earned money in the process.
“So, you should never try to time the market. In fact, nobody has ever done this successfully and consistently over multiple business or stock market cycles. Catching the tops and bottoms is a myth. It is so till today and will remain so in the future. In fact, in doing so, more people have lost far more money than people who have made money,” says Anil Chopra, group CEO and director, Bajaj Capital.
5. Follow a disciplined investment approach
Historically it has been witnessed that even great bull runs have shown bouts of panic moments. The volatility witnessed in the markets has inevitably made investors lose money despite the great bull runs.
However, the investors who put in money systematically, in the right shares and held on to their investments patiently have been seen generating outstanding returns. Hence, it is prudent to have patience and follow a disciplined investment approach besides keeping a long-term broad picture in mind.
6. Do not let emotions cloud your judgement
Many investors have been losing money in stock markets due to their inability to control emotions, particularly fear and greed. In a bull market, the lure of quick wealth is difficult to resist. Greed augments when investors hear stories of fabulous returns being made in the stock market in a short period of time. “This leads them to speculate, buy shares of unknown companies or create heavy positions in the futures segment without really understanding the risks involved,” says Kapur.
Instead of creating wealth, these investors thus burn their fingers very badly the moment the sentiment in the market reverses. In a bear market, on the other hand, investors panic and sell their shares at rock-bottom prices. Thus, fear and greed are the worst emotions to feel when investing, and it is better not to be guided by them.
7. Create a broad portfolio
Diversification of portfolio across asset classes and instruments is the key factor to earn optimum returns on investments with minimum risk. Level of diversification depends on each investor’s risk taking capacity.
8. Have realistic expectations
There’s nothing wrong with hoping for the ‘best’ from your investments, but you could be heading for trouble if your financial goals are based on unrealistic assumptions. For instance, lots of stocks have generated more than 50 per cent returns during the great bull run of recent years.
However, it doesn’t mean that you should always expect the same kind of return from the stock markets. Therefore, when Warren Buffett says that earning more than 12 per cent in stock is pure dumb luck and you laugh at it, you’re surely inviting trouble for yourself.
9. Invest only your surplus funds
If you want to take risk in a volatile market like this, then see whether you have surplus funds which you can afford to lose. It is not necessary that you will lose money in the present scenario. You investments can give you huge gains too in the months to come.
But no one can be hundred percent sure. That is why you will have to take risk. No need to say that invest only if you are flush with surplus funds.
10. Monitor rigorously
We are living in a global village. Any important event happening in any part of the world has an impact on our financial markets. Hence we need to constantly monitor our portfolio and keep affecting the desired changes in it.
If you can’t review your portfolio due to time constraint or lack of knowledge, then you should take the help of a good financial planner or someone who is capable of doing that. “If you can’t even do that, then stock investing is not for you. Better put your money in safe or less-risky instruments,” advises Kapur.
SHARE MARKET REALITIES
Stock Market should be included as the 8th wonder of the world in the list. It is amazing but prone to several external and internal factors of the Commercial Environment. There have been instances in the past where global tragedies brought down share prices (eg 2011 nuke disaster in Japan brought share prices down) while there have been normal scenes (Kingfisher Airlines share prices going down due to you-know-why).
The simplest and most basic rule which works behind the scenes in Stock Market is: Demand and Supply. Think about it – “why would people buy Kingfisher Airlines’ stocks when the company is itself going to fall apart in the next few days with no hope of revival?”. People prefer investing in such companies where:
- Innovation is at its peak helping company to rule market and create wealth for its shareholders
- Where the company’s EBITDA is good
These are certain factors which even Warren Buffett has stated in his speeches. Coming to the part where certain angel investors have invested in low-lying companies, it is because they have seen that the company is viable and will survive for the next few years.
In the next section is Warren Buffett’s 5 principles which any investor (senior/fresher) should keep in mind while investing in stock market.
WARREN BUFFETT’S 5 PRINCIPLES
1) How the company has been performing?
Companies that have provided a positive and stable return on equity (ROE) for many years are more preferable than companies that have only had a short period of solid returns. The longer, the tenure for good Return of Equity, the better. For the purpose of my analysis, I have taken 20% ROE for over 5 years.
2) How much Debt does a company have?
Larger debt means company servicing debt. All its earnings would go towards repayment of debt. What Warren Buffett believes is low debt ratio is good for investment. For the purpose of my analysis, I have taken Avg. Debt to Equity Ratio in last 5 Yrs at less than 0.5.
3) How much margins company is making?
While revenue growth is good, one should look also how much margin/profits the company is making. Buffett loves to invest in companies that have consistent improvement in margins. Again, long term performance about improvement in margins is better. For the purpose of my analysis, I have taken minimum 20% Avg. Dividend payout ratio in last 5 Yrs in last 5 years.
4) Are company shares are available at discounted prices?
Many of us would invest in good companies, but would not make profits. Why? Investing in strong fundamental companies is good. However, they should be purchased at the right time. One should look at company shares which are available at discounted prices where there is scope for high profits. For the purpose of my analysis, I have taken P/E ratio in between 0 and 15 for over 5 years.
5) Does the company offer unique products?
Warren Buffett says companies which have products that can easily be substituted to be riskier than companies that provide more unique offerings. For e.g. an oil company’s product – oil – is not all that unique because clients can buy oil from any number of other competitors.
Money is the need of the hour but careful consideration must be taken by every individual that share market investing doesn’t turn into a gambling proposition.
While there have been many winners, there have been many losers as well. The clear difference has been the decision making capability of both communities at the right type when it mattered the most.
Hope this article helps you get started in investing. Thank you!!!