Basics: Stock Investment

Stock
Investment
Basics
es
in
for Beginners
az
ag
_M If you want your
money to grow, there
are hardly any better
ks
options than investing

oo
in stocks.
B
e/
. m
//t
s:
tp
ht
Connect with Smartsavers
w w w. s a v e r s. m o n e y l i f e. i n
Stock
Investment
Basics
Stock
Investment
Basics
es
in
I
az
f you want your money to grow,
there are hardly any better
ag
options than investing in stocks.
_M For equity investors, certain stocks,
properly selected and discarded, can
ks
become the road to unimaginable

riches. When banks pay you 9% per
oo
annum, every few years a handful

B
of stocks fetch anything between

e/
100%-200%. If stock investing is

that rewarding, why are most people
m
averse to investing in stocks?

.
//t
s:
The reason is that making profits by stock investing isn’t easy.

tp
This e-book makes it easier for you to understand what stock

ht
investment is. It is for those investors who have never bought

stocks before and want to understand what the world of stocks
is all about and for those who depend on others’ advice and
predictions. Treat this is a stepping stone in your journey to make
the best out of stocks.
www.savers.mon e y lif e.in
2
Join Magazine Group https://t.me/Books_Magazines
Stock
Investment
Basics
What are
stocks and
shares?
es
in
Y
az
our share of Reliance, Infosys or
any other company represents
ag
a share of your ownership in the
company. You own a slice of every
_M
rupee of profit that the company
ks
makes and have a claim on its assets,

proportional to your stake. As your
oo
share of ownership, you get one

B
vote per share of stock to elect the

e/
directors and to express opinion

on some decisions. The real point
m
of owning shares is to share in the

.
//t
growth, innovation and wealth that the

s:
enterprise economy creates.

tp
ht
3
Stock
Investment
Basics
What are the advantages

of investing in stocks?
es
There are two powerful reasons why you should invest in stocks
in
and they will work for you in the future, especially in a fast-growing
az
country like India.
ag
Demographic Advantage: Tax Advantage
_M
G iven that most savers are still young
and India is a growing economy, at S hort-term capital gains on stocks
attract only a 10% tax and long-
ks
least 65% of your money should be in term gains attract zero tax. It is quite
oo
stocks either directly or through mutual perverse that speculative holding of

funds and 25% in post office and 10% just a few days attract 10% tax and
B
in cash and gold. Select companies will passively earning money on money by
e/
grow consistently over the long term with holding for a year attracts no tax while
m
the overall growth in economy. Create a business enterprises that create value
.
diversified basket of such stocks from in the first place have to suffer a million
//t
different sectors. kind of taxes. This is an unthinkably huge

s:
positive for stock investors. But that is

tp
10% the wisdom of our tax-planners and so

ht
go out and take full advantage of it by

Stocks buying stocks as long as low taxation
25%
Post office lasts on the risky speculative asset called
65%
stocks.
Gold
4
Stock
Investment
Basics
Kinds of stocks
Companies can be classified by their market value, which is their
number of shares multiplied by market price. As defined by their
es
size, Moneylife divides stocks as mega, large, mid, small and micro
in
az
ag
_M
ks
oo
Moneylife mega-cap stocks:

B
Stocks of those companies whose market capitalization is higher than Rs10,000 crore
e/
are classified as mega-cap stocks. These would include stocks of most well-known
m
companies like Hindustan Unilever, Reliance Industries, Infosys etc. All companies in
.
the two main market indices, Sensex of BSE and Nifty of NSE have mega-cap stocks.
//t
These are also called blue-chip stocks.

s:
tp
Moneylife large-cap stocks:

ht
Stocks of those companies whose market capitalization falls between Rs 10,000 to Rs

2000 crore are large-cap stocks, as per Moneylife classification.
Moneylife mid-cap stocks:

Stocks of companies whose market capitalization falls between Rs 2,000 to Rs 500
crore are classified as mid cap stocks
5
Stock
Investment
Basics
Moneylife small-cap stocks:

Stocks of companies whose market capitalization falls between Rs 500 to Rs 100 crore
are small cap stocks. The mid-cap and small-cap stocks are where the excitement as
well as the disappointment is. These companies grow fast and the best of them always
look pricey for their size and growth. Over time, however, some of them do justify their
es
high prices.
in
Moneylife micro-cap stocks:
az
Stocks of companies whose market capitalization is below Rs100 crore are classified as
ag
micr-cap stocks by Moneylife.
_M
Others such as business newspapers, exchanges and mutual funds may follow a
ks
different classification.
oo
Value stocks:
Stocks of companies that have excellent assets and potential for growth but may be
B
e/
down in the dumps temporarily are called value stocks. Their prices would be lower
than what seems fair. There is a powerful investment approach that only invests in value
m
stocks because these are seen to be bargains.

.
//t
s:
tp
ht
6
Stock
Investment
Basics
How to measure
corporate
performance
es
in
One of the first tenets of long-term investing is to find a way to value
az
stocks based on the corporate performance. How do you measure
ag
corporate performance? To invest in stocks or stay away from them,
_M
you have to understand the following set of basic financial numbers
that signify a company’s health and its earnings growth:
ks
oo
Operating Profit:
This measures the profitability of the core business operation and is expressed as sales
B
minus all costs except interest, depreciation and taxes.

e/
m
Profit after Tax (PAT):

.
Also called net profit, PAT captures absolute profit, but should not be studied
//t
independently, without looking at the sales-cost structure.

s:
tp
Earning per Share:

ht
EPS is expressed as net profit (profit after tax) divided by the number of shares. A
company with Rs 50 crore in earnings and a capital of 5 crore shares would have an
EPS of Rs 10. A continuously rising EPS is one of the most reliable predictors of future
price rise.
7
Stock
Investment
Basics
Cash Flow:
Reported PAT and EPS can be traps since PAT is an accounting number arrived at after
lots of adjustments. A company can show healthy PAT but may have a poor or negative
cash flow. A negative cash flow also indicates that there is a fundamental problem with
the company’s operations: either the profitability is too low or money is stuck in high
es
inventories and receivables.
in
az
Profit Margins:
While profits are important, equally important is profitability – expressed as a
ag
percentage on sales. Expressed this way, margins allow us to compare companies
_M
across sectors and within a sector indicating how profitable the operations are.
ks
Return on Capital Employed:

RoCE is calculated by dividing profit before tax and interest cost by capital employed.
oo
Capital employed is the total of all equity and preference capital, reserves and all debt.
B
RoCE measures how the entire money invested in business is doing. RoCE is best
e/
compared to the cost of borrowing. If the interest on fixed deposits is 12% whereas
m
a company is earning about 14% as RoCE, clearly it is not a great business for
shareholders.
.
//t
s:
Dividends:
tp
A key measure is regular dividends to shareholders that give them confidence that the
company is in sound financial health. When dividends are increased, the message is
ht
that the company is prospering. When dividends are cut, investors receive the opposite
message and conclude that the company’s future prospects have dimmed.
8
Stock
Investment
Basics
How to select the

right stocks
es
in
az
ag
_M
ks
oo
B
e/
. m
//t
T he best stocks are those that have excellent financial performance and are not
s:
valued highly. If the price is in an upward trend, it helps. This would combine value
tp
with price action – an essential combination to win in the game of stock picking. The
ht
three most important measures of performance are sales growth, growth in net profit or
Profit After Tax (PAT) and return on equity (RoE). PAT indicates the absolute profitability
of operations. EPS indicates the profit per share and RoE indicates overall profitability
on owners’ (shareholders’) funds invested. Once you have decided to identify good
stocks based on these parameters, you will have to estimate whether they are
overvalued or not. You must at all times avoid buying stocks with poor financials.
9
Stock
Investment
Basics
How to
invest in
stocks
es
in
az
Primary market
T ag
he shares of a company are made _M
available to the investing public for
the first time through what is called an
ks
Secondary markets
Initial Public Offering. This is the first time
A
oo
a company issues stock. This segment fter an IPO is over, shares are
of the market is called primary market. traded or bought and sold in stock
B
You can buy these stocks from the stock exchanges among investors in what is
e/
exchange once they get listed. called a secondary market.

. m
//t
s:
tp
ht
10
Stock
Investment
Basics
How shares are valued

Price and value should determine
what to buy, when to buy and when
es
to sell. There are several approaches
in
to valuation. All of them are partially
az
true. You can use them only when you
ag
know the context in which they are
useful as also their limitations. Shares
_M
have an intrinsic value and a market
ks
value and usually there is a huge

oo
divergence between the two. Either the market value is too high or
too low. And therein lies the opportunity. The intrinsic value is the
B
underlying value of the business.

e/
.m
Fundamental analysis:
//t
Theoretically, when you buy a share, you are buying a proportional share in a business.
s:
So, to figure out how much the stock is worth, you should determine how much the
tp
business is worth. To do this you have to make a detailed analysis of the financial
ht
condition of the company. This is known as “fundamental” analysis. Some believe that
this is the only rational approach to valuing stocks.
Quantitative approach:
There is another approach to investing. It is using computers and mathematics to
detect patterns, capture the pattern in models/formula and teach computers to provide
11
Stock
Investment
Basics
buys and sells based on these models. This is the quantitative approach to investing.
Applying quantitative tools is also called data mining. Quants or data miners develop
a hypothesis defining a relationship among various past data (prices, seasons/months,
streaks of winning or losing days etc.), then look for how statistically significant that
relationship is. This includes testing the relationship within data in different time periods,
es
market environments, etc., in order to test the robustness of theory. Finally, they would
in
take investment/trading positions by presuming that those past relationships would
az
continue to hold in future. It is as close finance can come to a scientific approach.
ag
Technical analysis:
_M
Technical analysis is the study of market action, using price charts, to forecast future
price direction. The central belief in technical analysis is that all factors that influence
ks
market prices (fundamentals, political events, natural disasters, and psychological

factors) are quickly discounted by the market and prices reveal everything. Investors
oo
who focus on chart readings call themselves technical analysts or chartists

B
e/
. m
//t
s:
tp
ht
12
Stock
Investment
Basics
Risks
involved
es
in stock
in
investment
az
W ag
hile blue-chip stocks do rise steadily over time, stocks are market-linked
_M
products and so there returns are not guaranteed. Bonds return your money
ks
at the end of the tenure plus interest. Stocks may go up and down and while all good
stocks pay dividends, it is not mandatory. Companies can go bankrupt and your
oo
investment can disappear. How can you emerge as a successful investor? Consider the
following rules
B
e/
.m
//t
s:
tp
ht
13
Stock
Investment
Basics
Count-down to
successful stock picking
es
in
10 Ignore Extremes: Technical analysis is the study of market action,
az
using price charts, to forecast future price direction. The central belief
ag
in technical analysis is that all factors that influence market prices (fundamentals,
political events, natural disasters, and psychological factors) are quickly discounted
_M
by the market and prices reveal everything. Investors who focus on chart readings call
themselves technical analysts or chartists.
ks
09
oo
Avoid Big Losses: If a stock falls 90%, it has to rise by 900% to get
you back to where you were and that will not happen. So you can never allow
B
yourself a catastrophic loss. Put predetermined stop losses to avoid being wiped out.
e/
Do whatever it takes to keep your downside limited and your upside unlimited.
m
08
.
Keep it Simple: It is not necessary to have complicated models for

//t
success. For instance, the simple idea of buying blue-chips on large declines
s:
works fine.
tp
07
ht
Ego & Emotions: Holding on to a stock thinking you are right or

because the company is good is a sure way to lose money.
06 Patience: Unlike mutual funds you do not need to be always fully

invested. When the market is overheated by your valuation parameters and
there are hardly any picks with attractive risk-reward ratio, it is perfectly fine to wait.
14
Stock
Investment
Basics
05 Risk Control: Stocks are risky. Your returns depend as much on

controlling risk as much as fetching rewards.
04 Develop a method: If you don’t have a consistent method of buying

and selling, your returns will be pretty low.
es
03
in
Learning from Experience: Deep experience is an essential
ingredient. Unless you are born with exceptional personality traits, losses
az
will be a major part of life. It is even alright for traders to have a majority of losing
ag
trades, provided the losses are small and the winners are big. Winners learn from their
experience of losses and take responsibility for it..
_M
02
ks
Start Small & Stay Informed: It takes years to learn what

drives stock prices, the value of method and discipline and emotional control.
oo
Until then start in a small way, especially if you feel very confident. Prudent investing
rests on keeping up with the flow of basic information. Smart investors seek intelligent
B
and consistent opinions and track some key investment parameters to ensure that
e/
their investments are on track. They avidly read market history which helps clear our
m
minds about a lot of contemporary issues and trends. Besides, crunching numbers are
.
//t
an important part of the stock picking process and successful investors do their own
s:
number-crunching.
tp
01 Commitment: Winning stock pickers have a strong commitment to their

ht
job of finding a winning edge, developing a method and sticking to it through

the rough and smooth.
15
Stock
Investment
Basics
16 Timeless
Tips for
profitable
es
stock
in
az
investment
ag
_M
Here is some timeless advice on stock investing
ks
culled from experts:

oo
B
e/
01 An attempt at
02 If stocks don’t
03 Buy and hold does
m
making quick seem cheap by not work always

.
//t
money leads to losses historical standards, stand Never average down a losing
s:
far higher than the initial aside or invest in very small investment unless it is part of a
investment. amounts. well-thought out method.
tp
ht
04
a hot tip.
The best tip: there
is no such thing as 05 Don’t fall in love
with your stock; it
will never fall in love with you.
06 Valuations don’t
matter in the short
run and “short run” can last
It will fall with the market. for months and even beyond a
year.
16
Stock
Investment
Basics
07 Calculate first how

much you can
lose, not how much you can
08 Experts care about
risk, novices
dream about returns.
09 Forecasts,
especially by
market experts are usually
gain. useless.
es
in
10 11 12
az
Develop a method, Lots of humility Stocks fall more
stick to it and have helps. A rising tide than you think
ag
patience. raises all ships and so you may
_M and rise higher than you can
have been just lucky. possibly imagine.
ks
13 14 15
oo
Investing in what Bear markets start Neglected sectors

popular stocks, fad in good times. Bull often turn out to
B
industries and new ventures markets start in bad times. offer good values.
e/
are riskier than they seem.

. m
//t
16
s:
Don’t assume
tp
either the media

or fund managers know more
ht
than you. Their record shows

they don’t.
17
Stock
Investment
Basics
6 Stupidest Things
People Say about stock
investments
es
in
az
How much lower can it go?
ag
After the bust of 2000, the four hottest stocks met with the following fate. Pentamedia
fell from Rs 2109 to Rs 4, DSQ Software fell from Rs 2820 to Rs 6. DSQ Software has
_M
been now delisted from the exchanges and the promotor of the company is absconding.
Himachal Futuristic fell from Rs 2552 to Rs 7 and SSI with which the famous US stock
ks
exchange Nasdaq even had a joint venture, fell from Rs 7200 to Rs 40.
oo
How high can it possibly go?

B
As the saying goes, if you want to make 10 times your money, you can’t sell before the
e/
stock goes up 10 times. But nearly all investors sell too early thinking how high can it
m
possibly go. The only way you make big money in stocks is letting them go higher - by
.
not taking a profit early. As another saying goes, let your profits ride...
//t
s:
It is only Rs 20 a share, what can I lose?

tp
You can lose the entire Rs 20, a 100%. loss Whether a stock is Rs 5 or Rs 50 if it falls to
ht
zero, it’s a 100% loss. Resist that “bargain.”
They always come back

Oh yeah? SSI, DSQ Software, Pentafour... It is a silly and dangerous idea to assume
they come back. Besides, while you are waiting for them to come back, what about the
stocks that have doubled?
18
Stock
Investment
Basics
When it rebounds, I will sell

We can hear it again and again. When it rebounds, you decide there was nothing wrong
with after all and decide to keep it. If it does not rebound... well, they all come back!
What me worry? I am long-term investor
es
In a bear market everything goes down. the best of stocks can lose up 60% of their
in
value as happened with Wipro between 2000 and 2003. Long term is often short term
az
goes sour and belief in the long term is simply a justification for people to not pay close
attention to your investments.
ag
_M
ks
oo
B
e/
. m
//t
s:
tp
ht
19
Stock
Investment
Basics
As a premium member of the Moneylife Smart Savers’

you get a shortlist of the best mutual funds to buy
and also suggestions about when to buy. If not a
es
member, what are you waiting for?
in
az
Upgrade
ag
_M
ks
Watch our video on the unique

oo
concept of Smart Savers’

B
e/
m .
//t
s:
tp
ht
20

Basics: Stock Investment

Uploaded by

Copyright:

Available Formats

You might also like

Basics: Stock Investment

Uploaded by

Document Information

Original Description:

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Basics: Stock Investment

Uploaded by

Copyright:

Available Formats

Stock

options than investing

Connect with Smartsavers

become the road to unimaginable

annum, every few years a handful

of stocks fetch anything between

100%-200%. If stock investing is

averse to investing in stocks?

The reason is that making profits by stock investing isn’t easy.

This e-book makes it easier for you to understand what stock

investment is. It is for those investors who have never bought

www.savers.mon e y lif e.in

makes and have a claim on its assets,

share of ownership, you get one

vote per share of stock to elect the

directors and to express opinion

of owning shares is to share in the

growth, innovation and wealth that the

enterprise economy creates.

www.savers.mon e y lif e.in

What are the advantages

stocks either directly or through mutual perverse that speculative holding of

different sectors. kind of taxes. This is an unthinkably huge

positive for stock investors. But that is

10% the wisdom of our tax-planners and so

go out and take full advantage of it by

www.savers.mon e y lif e.in

Moneylife mega-cap stocks:

These are also called blue-chip stocks.

Moneylife large-cap stocks:

Stocks of those companies whose market capitalization falls between Rs 10,000 to Rs

Moneylife mid-cap stocks:

www.savers.mon e y lif e.in

Moneylife small-cap stocks:

stocks because these are seen to be bargains.

www.savers.mon e y lif e.in

minus all costs except interest, depreciation and taxes.

Profit after Tax (PAT):

independently, without looking at the sales-cost structure.

Earning per Share:

www.savers.mon e y lif e.in

Return on Capital Employed:

www.savers.mon e y lif e.in

How to select the

www.savers.mon e y lif e.in

exchange once they get listed. called a secondary market.

www.savers.mon e y lif e.in

How shares are valued

value and usually there is a huge

underlying value of the business.

www.savers.mon e y lif e.in

market prices (fundamentals, political events, natural disasters, and psychological

who focus on chart readings call themselves technical analysts or chartists

www.savers.mon e y lif e.in

www.savers.mon e y lif e.in

Keep it Simple: It is not necessary to have complicated models for

Ego & Emotions: Holding on to a stock thinking you are right or