In this article, the person will be going to grab every detail knowledge of the share market and its investing process the person just need to follow the 7 steps and he/she can begin investing with a little amount as Rs. 10,000 investment.
Below are the steps to follow for investing:
- Screening and Filtering the stocks using Financials
- Select only the companies whom you understand
- Choose companies with higher Moat
- Choose company having Low Debt Levels
- Use financial ratios RoE and RoCE
- Honest, Transparent, and Competent Management
- Select the right Price to Buy the Stock
Types of Investing
Before beginning the detailed description of step by step approach for picking stocks, let’s find out that there are two different methods of investing money that is practised by many investors across the world.
- Trading
- Value Investing
Step 1. Screening and Filtering the stocks using Financials
There are many stocks listed on BSE and NSE and it’s impossible to explore and understand every one of them by their entire financial information.
Screening criteria
- Market Cap > Rs 500 cr
- Sales and Profit growth >10%
- Earnings Per Share(EPS) growth rate is increasing for the past 5 years
- Debt to Equity Ratio <1
- Return on Equity(RoE) >20%
- Price to Book value(P/B) <= 1.5 or low compared to peer companies within the same industry
- Price to Earnings(P/E) < 25 or low compared to peer companies within the same industry
- Current Ratio > 1
You don’t have to stress the above financial information. There are many Online screener tools available on financial platforms that provide this information readily.
You can then check the other financial ratios as part of the screening criteria with the help of a company factsheet.
Step 2. Select only the companies whom you understand
The next move is to visit the website of company, keeping track of updates on media platforms, searching for the company on Google, and getting feedback from fellow investors. Knowing the company will help in understanding the company’s business.
You must start investing in those companies that you understand, in your initial stage when you are learning to invest in stocks. This will reduce your chance of losing money.
Step 3. Choose companies with higher Moat
Now after understanding the company next is to identify companies that have passed the test of financial numbers and whose business models are easy to understand.
It is most important to analyze the company from a qualitative aspect (Moat).
In terms of business, Moat is the advantage that one company has over the other company in the same industry. A company having a higher MOAT value is difficult for the competitor to replace from the stock market.
Step 4. Choose company having Low Debt Levels
Large debt levels generate a significant risk to the company. The screening criteria which is used to filter the stocks. These two ratios are indicators showing that how heavily is company dependent on borrowed debt to fund its growth and whether the company will be able to meet its short-term capital obligations. A company that is lowering its debt will automatically increase its profits is good for the health of the company.
Step 5. Use financial ratios RoE and RoCE
These are two financial ratios Return on Equity(RoE) and Return of Capital Employed (RoCE) to help in selecting the right stocks.
RoE- It is the percentage representation of a company’s net income.
RoCE- It is the primary measure of how efficiently a company utilizes all available capital to generate profits.
The company having high RoE and RoCE signals the great potential for future growth in terms of the company.
Step 6. Honest, Transparent, and Competent Management
Before investing, to avoid fraud the company you plan to invest in must be run by honest, transparent, and competent management. The management includes Promoters, CEO/MD, CFO among others.
Step 7: Select the right Price to Buy the Stock
Buying at the right price would provide you with a margin of safety, protecting your investment from any downside risks. the right price is the price that is way below the actual worth of the stock.
To invest in the stock market you don’t need to have an MBA or a finance degree to understand how to invest in stocks. Some of the best investors in India and the world come from very humble and normal academic backgrounds.
