To invest in share markets in India used to be complicated before the age of the internet. You got physical papers showing your investment in the market. The flow wasn’t as easy as it is now where you can click on a few things and execute trades instantly and error-free.
To invest in shares in India, here’s what you must do to get started.
- A PAN Card
A PAN-Permanent Account Number is a requirement for carrying out financial transactions in India. These days PAN and Aadhaar can be used interchangeably.
The 10 digital alpha numberic combination is must-quote for paying income tax. Now its must have for opening bank accounts and for mutual funds too.
And it’s also a requirement for buying and selling shares.
2. Get a Broker:
Going to the stock exchange floor to transact shares may seem like a fanciful idea. For the common man, such ideas only remain fancies.
There are people and companies who can do sell or buy shares for you. They’re called brokers and are registered by SEBI- Securities and Exchanges Board of India.
Being registered with these companies whether offline or online lets you buy and sell shares.
With a broker you have the license to trade and deal in securities or shares in the market.
I use Zerodha to buy and sell shares. And they’re one of the biggest discount brokers in the country. By discount brokers I mean online brokers that don’t charge you an arm and leg in transaction fees like ICICI Direct or Sharekhan.
3. Get a Demat and Trading Account:
I am trading with an online broker Zerodha. They have their own Demat account. Earlier with the sign up forms I had to sign up to IL&FS. BUt ever since the scam broke out, they started their own Demat services.
So what is a demat account and how does it benefit you?
A demat account will hold the shares in your name in the dematerialized form and will reflect on your account.
You cannot hold physical papers showing that you own such and such shares. Instead, the demat account does this for you. Whenever the shares are transferred they go from the demat account to the stock trader.
You buy and sell shares with a trading account which is an intermediary agency between the share market and you and facilitates the purchase and sale of shares for you.
Usually most brokers take care of the demat account. Whenever you approach a broker for opening an account whether offline or online, they in tandem open the demat account for you as well.
4. Depository Participant:
The fourth agency in this scheme of things is the Depository participant. There are just two depositary agencies in India. The first one? NSDL that stands for National Securities Depository Limited and the second one Central Depository Services Limited.
They provide you an account that lets you store the shares. How is it different compared to the Demat account. With the Demat account, you see the number of shares you own and is not a physical place for holding the shares. With the NSDL or CSDL account it’s sort of a virtual bank locker holding the shares. Again this is not something that affects you directly as at the time of account opening the broker takes care of all these nuances for you. So you need not be worried about any of it.
5. Buying and Selling:
When it comes to the actual process of purchasing and selling shares you need to tell the broker the quantity you want to buy and the price for the same.
If you want 10 shares of Justbuy at 500 each, you need to tell the broker of the same quantities and he makes the purchase for you. Reaching out this way is long wounded. you wish to buy at which price.
In case of online broker too, they usually have customer care numbers where you can place your order with the phone.
The order will get executed if and when the price reaches the levels you specified.
The order remains valid for a day at most and if within the day the order isn’t executed the order gets cancelled after the cut off time of 3:30 pm on NSE.
There are two exchanges on which shares are listed.
The Bombay Stock exchange BSE and the National Stock exchange NSE.
These are the only exchanges in India where you can buy and sell shares. Also mention to the broker which of these exchanges you want to buy or sell shares from for them to process the order.
Sometimes shares of companies are listed on both the exchanges with minor price differences of a few paisa.
There are couple of ways in which you can approach investing in shares.
You could trade day to day. Or buy stocks for a period to sell later.
Or purchase stocks to get dividend yield.
I will be discussing this in more detail later down the post. But first let me tell you how investing in stocks differs. And what are the best methods.
- Short term investments
- Long term investments or value investing
Both of these investment strategies require a different approach.
With the first one you’re focussed on making short-term profits. You sell when the market rises, also called a bull market and buy when the market is falling also called a bull market.
You can sell and buy in both bullish and bearish markets. To make a profit the only rule is to buy low and sell high.
This involves considerable risk in timing the market. You never know in which way a stock would choose to go. Even in a bullish market a stock may decide to play with you and go in all the wrong directions.
If you want to be day trading you need to know the market really. Also you need several tools and in depth knowledge of technical things around stocks to forecast movement.
As such, someone who enters the market without this know-how can make huge losses owing to the volatility of the market. And it can wipe out a heavy amount from your accounts. To be successful trading shares for the short term you need to develop a big know-how regarding how the market operates.
So if you’re not keen on understanding technicality or the stress associated with day trading, play to your strengths by focusing on value stocks.
Also up until 2 or 3 years ago if you held stocks for a long time there was no tax on the profits. Those golden days are over. But investing in stocks is still a great thing to do.
By staying invested in stocks for a long term you get dividends, you enjoy things such as stock splits. What’s more is that as stock prices gain and turn more profitable over the years your value invested skyrockets. Done the right way direct investment in equities nets you a high return.
Such stocks that end up zooming year on year are multi baggers and net you a high return.
BUT, the same stock can go down the drain and result in a loss as well. There are several companies that off themselves in this manner.
Also if there’s a recession, you’re somehow muted by the impact. There may be a big fall in the prices. Eventually things bottom out and hopes are set high after the recession packs home.
Stocks make you money because they compound your money. Compounding is rightly called the 8th wonder of the world. Those who understand how it works gain by it and those that don’t pay it.
With investing in a share for a long time, you get the benefits of compounding as the value increases incrementally creating a lot of wealth once you decide to cash out.
To understand which stocks to invest in, understand the stock first.
Use principles of fundamental analysis to understand what makes the particular stock tick.
This will help you focus past the short term fluctuations to see the real value of the company and how it can turn out be a great investment for you.
You see things like underlying business operations, management and news regarding growth.
Trading is a short term myopic view where you’re invested in a quick 10 or 20% gain. You’re constantly fiddling sometimes losing and making money but never to make a big return.
You save some tax
Even though there’s tax associated with capital gains on long term holdings, you’re only paying 10% in tax, despite the tax bracket you belong to. With short term holdings that are sold earlier than a year you pay 15% tax.
With stock markets there’s always the risk that the stock that’s been recommended to you doesn’t live out to what it was claimed to be. It’s tricky. You risk losing money every day. And you shouldn’t be bobbing with exuberance with your pick.
Based on all the factors that I am listing below, you can screen stocks from few companies.
How to filter stocks
Use some screening criteria like P/E and earnings growth to decide if the stock you zeroed down is experiencing growth or decline. Read on forums and blogs as to which stocks are beating expectations. There are also stock pickers on business channels. Don’t trust them blindly but test all of them with the criteria I set before you.
Filter out stocks that don’t match this criteria.
Understand the companies whose stock you’re buying
Good fundamentals aren’t alone the best criteria to decide if a stock is worth investing in.
In the next step, with the selection of stocks you already have, read up about the companies.
Visit the company site, though I suspect that there will be much relevant info. What I do is read up regarding the company on BSE. BSE lists company announcements, pdf uploads and statements. For each stock Money Control does the same and there’s an active discussion forum discussing about the latest happenings about a company. Please beware that there’s a lot of nonsensical comments and garbage one needs to wade through to get real value from the discussion forum.
Learning about a company is a splendid way to understand how the company operates.
If you lack a background in stocks learning about different companies ensures you have the task set ahead of you.
It’s also possible you find out more about stocks that you’re passionate about. Given your interests or domain knowledge.
Given that most of the stocks you’re investing in are in India, the general direction in which the economy is moving is a good indicator of where you should put your money in.
Find What They Do
So when you purchase a stock have a decent idea of what you’re getting yourself on to.
Create good knowledge regarding your investments. What’s the company selling? What are their products. If its a service company, what services are they selling. How profitable they are? Is it the kind of company that will stay in business years after today?
Develop an idea regarding who they are and what they do.
You might have heard of Warren Buffett and his investing mantra. For Berkshire Hathaway a company he owns, he reads tomes and tomes of pages of research before committing to purchase a stock. Use search engines. Visit company website to read about them. Ask all potential questions that you can think of before you choose a company and buy its stock.
That’s the first thing.
Follow that up by finding out the basic metrics surrounding stocks which are as follows:
Price/Earnings Ratio or the P/E ratio
Understanding P/E ratio is simple. It means price by earnings ratio. It means how much people are willing to pay to purchase one stock of the company for every dollar it earns. If it has a PE ratio of 7 that means for every dollar earned people are paying you $20 as investment.
Yes a 7x higher P/E means the stock is expensive for you. But if people are ready to pay that price point that means there’s a lot of potential for growth. There could be a reason why similar companies are undervalued and this one commanding a high rate. Find that reason and you could be part of that growth journey.
If a company is regularly paying dividends to its investors that’s the kind of company you want to pay attention to.
Regardless of the stock price, if the company is performing well you get paid a dividend on the company’s profits. It can be as little as 50 paise per share you own or can be high of Rs 18to 20 per share. If you don’t have time watch the market every day, and you want your stocks to make money without that kind of attention, look for dividends. You can purchase stocks to lead a completely passive income lifestyle with high dividend.
With every online stock broker you have access to the stock’s charts.
The chart could show the stock heading upwards or downwards. Don’t make a simplistic determination of going with a stock based on whether its moving upwards or downwards. Purchase stocks based on finding out the reasons behind their movement.
With research time and enough patience you will be able to figure out what is what.
Do companies have a unique value proposition
For instance, at this juncture I am reminded of Rakesh Jhunjhunwaala, who took into investing in companies depending on where the economy went. Each of his initial investments be it Titan or anything else reflected on the general consumption behavior of the people of this country.
So if the country is moving from coal and fossil fuels to renewable energy and there’s a company making waves in this sector that’s one direction to invest in.
Also consumption patterns are another factor to look at. For example Cupid is a company that manufactures multiple condom brands. Given our penchant for population explosion and the need for controlling it. Plus growing awareness on STDs and birth control benefits as education eradicates poverty and grows awareness that’s one sector that will be driven by consumption.
In yet a third example, government policies will have a big say on the profits and company diversification policies. For example ITC products that you may have witnessed in FMCG and notebooks also is the biggest manufacturer of cigarettes in the country.
Given the stratospheric GST slabs on tobacco products, ITC is fast diversifying. The profits are down but the company will eventually taste much success.
If the country is moving towards making more roads, the growth in the sales of cars will be much. If real estate grows, supplementary companies that manufacture tiles and cement will grow.
The business model and the consumption patterns that emerge have a big say on whether the company would grow or not.
There are dime a dozen companies that are extremely successful and there are competing products for each product.
There are thousands of soap brands. Dove is consistently on the top because it has differentiated itself to a target market. Dove softens skin for women. So all those women who want soft skin turn to Dove. No other company has branded themselves to this target niche and therefore this USP will stay with them for years to come.
This is the advantage they have over their competitors. You should find companies that have a big advantage over their competitors. And this becomes a sustainable investment for you.
Competitors are going to have a hard time replacing this particular company.
Second, look at the example of Coca cola and Pepsi. They both have their secret and patented formulas. Though Pepsi has a wider appeal and market, Coca cola has a core user base that’s not jumping over to the other side. Theylove the flavor.
There are several types of USP. It can be a unique branding, it can be unique patent or formula, or it can be shield in barrier to entry or monopoly.
Be it distribution network or be it trading at a modest price to earnings ratio, if you get to a company that has potential to grow you found a winner.
Look for such companies to generate real wealth for yourself.
Let’s look at few more examples.
It was 1988 after the Black Monday stock crash that Warren Buffett started purchasing Coca cola stocks.
He had purchased 23.35 million shares totalling 1.8 billion dollars.
Dropping more than 20% of Berkshire’s total assets into purchasing a stock was a signifcant decision.
How did it turn out?
It ended with a lot of gains. Especially when you look at the dividends. Currently coke’s payout of .40 per share and the fact that after stock splits and other factors the total is now at 400 million shares, the investment brought them $640 million in dividend income. Since 1995 they earned over 7 billion from dividends alone.
Why did Buffett take this decision. The brand had a lot of potential to capture overseas market according to him. And the modest valuation of trading at 15x PE number made the stock attractive. From 1989 to 1999 earnings per share great a compounded rate of 12%.
His recent investment is also noteworthy. Buffett recently purchase a lot of stock from RH home furniture.
RH has a unique approach with detail. They skimped on their digital first strategy to go old school with brick and mortar stores and no digital advertising.
They have a membership model with a mail order catalogue.
The reason behind this quirk is they want to take a step back and build on a customer experience that cannot be replicated elsewhere. This gives them complete control over the brand and from concept to customer. It’s rare in today’s landscape.
What might be seen as foolhardy works for them.
The shares have rallied 150%. And their quarterly results each beat the previous reuslts in terms of earnings.
Does the name Fedex ring a bell? They’re a popular delivery service. Starting February 2018, they lost $25 bilion in market value. That’s a 39% loss. This year its touted that Fedex and other delivery services will lose a lot moe market share.
AMazon between 2018 and 2019 captured 20% of the e commerce delivery market.
US ecommerce rallied by 84% making the pot sweeter for all stakeholders. Be it fedex UPS or postal services every seemed to be winning except they didn’t/ As Amazon enters these businesses, many such businesses turn into an amazon feature
Storage and cloud a feature and so on.
It’s a monopoly where entire industries are gobbled and spit back by giants such as amazon.
Fedex will get featurized by Amazon and will make it another part of its identity. Amazon can make investments for such featurized lists that fedex can never live up to.
Fedex earnings are disappointing missing even the muted market expectations.
It’s nightmare today. Investors are spooked. Everywhere there’s news of them losing business. And there will be nothing left soon after
Amazon will invest $1.5 billion in its one-day shipping initiative.
Invest in companies with low debt
Debt servicing can take off a significant chunk from final profits.
If the earnings are dismal and debt’s growing that could be signs of trouble.
Choose ones that aren’t too dependent on capital borrowings to make ends meet.
If a company is working on reducing debt that’s a positive sign that it will increase profits eventually.
Go to MoneyControl and look at the company balance sheet. All debt obligations including short and long term obligations are listed here.
Long term debt is something that comes due after a year. And current liabilities are to be serviced now. You will also see the interest payments they’re making.
Use ratios like RoE and RoCe
When it comes to stocks financial ratios like Return on Equity and Return of Capital employed which are RoE and RoCE are two important factors.
RoE gives another metric to track company’s profitability. While RoCe shows you how effectively a company utilizes the money invested in it.
In order to generate profits from the invested amount.
Put together they help you wrap your head around the profitability of a company and how nicely it can utilize its resources to generate a profit.
High RoE and RoCE signals that the company is on track to grow in the future and generate a lot of wealth for its dear investors.
Just take the example of this stock that has been growing consistently. Over the past 5 or so years that RoE and RoCE metrics are increasing and that’s reflected in the share prices as well. The prices have increased by 100s of percentage points from where it stood 5 years ago.
I value transparency above a lot of things. If the management is involved in unlawful activities that cause heartache to investors that’s not the stock to entrust your hard earned savings.
There are hundreds of companies engaged in shady deals in the Indian stock markets as well as the outside stock markets.
Here’s a recent example that comes to mind. There are a lot of gold and jewelry companies in India like Titan, Rajesh exports, Gitanjali gems and PCJ to name a few. I won’t talk about Gitanjali.
But PCJ. Of late the news came to light that two years ago when they held a stock buyback and the buy back was cancelled by the prime lender SBI, the promoters of the company chose to divulge that information to certain select traders who made a killing with the news.
Retail investors who didn’t know of the news until it was much too late lost a significant portion of their savings as the buyback deal was cancelled and the stock price took a dive from which they never really recovered. It first went from high 250s to 150s and now is trading at 24 rs as of writing this post.
The promoters were fined and are prevented from trading on the stock market for a few years as penalty. Misleading shareholders, accounting frauds and insider trading are prime examples of a dishonest management that doesn’t care about retail investors.
Choose a stock that’s run by honest people or at least those who hold high standards of accounting and other good practices.
To that end there are a couple of things you can do to know more about the company.
Use google search to understand the details of the management and any or all news of fraud on the company.
Annual reports are a must read to understand which direction the company wants to move, their growth prospects and steps every year and vision and mission.
Yes they will be painted in good colors to encourage investment but you can always read between the lines to see if actual performance meets the stated performance.
Thirdly look at promoter’s pledged share holding. If promoters are quitting their holdings that are signs that the ship has run against an iceberg and is about to sink. On the flipside, if promoters consistently increase their holdings in a company that signals trust and positivity. They’re green flags for growth.
Now that you know which stocks to purchase zero down on a few from the final list to drop your savings into.
A stock may be good but if the prices are way high you won’t be able to generate significant earnings from it. It matters to trust and invest in shares of companies that are evenly priced.
Vested is an app that makes investing in stock markets easy. When you sign up you get a sign up amount of $5 to kick start things.
The stock recommendations on its portfolio match the risk appetite of the individual.
Vested takes your money and invests it in foreign shares which is a difficult and painful path for Indian investors.
Foreign investing is expensive and the process is a tiring journey.
Plus there are no platforms that allow fractional investing which is where you take a big stock price and divide it among several investors.
You can micro invest with Vested for as low as $1.
With these innovative concepts people were quick to grab the opportunity that presented itself.
The app gained 10000 or so downloads in 3 months.
It has an intuitive dashboard where you can easily track your portfolio, understand how its performing. You can track daily returns, the total investment amount, total returns by individual stocka and so on. The app shows a sector wise breakdown of stock performance. It also grabs stock headlines and relevant news.
The Bottom Line
Nothing takes the place of exhaustive research. However, one key way to protect your assets is to invest for the longer term by taking advantage of dividends and in companies that are growing, are transparent and are valuable.