JUST BECAUSE YOU HAVE SURPLUS MONEY –

DON’T ITCH TO INVEST IN HURRY – RESEARCH AND PURCHASE

CARDINALS OF INVESTING IN STOCK MARKET

1. Look out for following six fundamentals in a stock (it is a cumbersome and thankless
exercise but you are investing your hard earned money, you have to be careful):-

(a) P/E - Lesser than P/E prevalent in a particular sector to which a

stock belong to. You can check sector P/E on several open-
source website. But preferably aim for stocks having P/E less
than 20.

(b) P/B - Less than 2 (definitely not more than 3 at any cost unless
ROE is more than 24 %).

(c) ROE - More than 12%.

(d) Debt to Equity Ratio - Less than 0.5% (definitely not more than
01 at all).

(e) Stock Price - In the higher half (until midway is OK) on 52 week scale
and candle stick chart showing it is moving up, that is,
wherein its Daily Moving Average is higher than 50 Days
DMA and 50 days DMA is higher than 200 days DMA

(f) Company should be filling its return to Stock Exchanges as mandated by

SEBI and making profit in preceding three Quarters1 (at least) (more the merrier, six
is amazing ball park figures for pursuing a stock). Remember stocks prices moving
up does not mean company is making profit but vice versa will mostly be true.

Note : Remember all boxes have to be ticked (even if one parameters

as listed above is not matching, refrain from buying such stock). There
are more than 4000 stocks listed on BSE and NSE. Therefore, you will
definitely get some stocks to buy, if not today then tomorrow). Hard
earned money need not be wasted.

(g) Last but not the least – Look for company who pay dividends
more than 2 % a year. This 2% dividend takes care of your Security Transaction
Tax which you pay whilst buying and selling stocks. It is desirable but not absolute
necessity. Most government owned companies do pay dividends but make
slow profits therefore, avoid govt entities. If still if you buy govt companies, then
look for dividend of more than 4%.

2. Before Investing, note down values of parameters indicated at Para 1 above.

Retain the stock till the time stock continues to hold above parameters. Generally only PE

1
The balance sheets are available on this link List Of Securities (bseindia.com). Just enter the name of
company in the relevant column and balance sheets of last ten years will come up.

JUST BECAUSE YOU HAVE SURPLUS MONEY –

DON’T ITCH TO INVEST IN HURRY – RESEARCH AND PURCHASE
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JUST BECAUSE YOU HAVE SURPLUS MONEY –

DON’T ITCH TO INVEST IN HURRY – RESEARCH AND PURCHASE

keeps on improving as the value of stock goes up, rest all parameters remain same.
Increase in PE indicates investors positive sentiment towards growth story of a company.

3. How much to invest:-

(a) Total 70% of funds should be invested in large cap companies. Do not invest
more than 15% in a single large cap company.

(b) Total 20% funds should be invested in mid cap companies. Do not invest
more than 10% in a single mid cap company.

(c) Total 10% funds should be invested in small cap companies. Do not invest
more than 5% in a single small/ micro cap company.

(d) Do not invest more than 20% in any particular sector. There are so many
sectors in the market, pse search and check on www.sebi.com.

4. Do not panic. If a particular stock falls up to 30% from purchase price, pse do not
panic. Out of every five stock choices you make as per parameters above, one will rise
astronomically, one will rise commensurate to BSE/ NIFTY index, one will remain neutral
(no profit/ loss), one would fall commensurate to its parent sector and one would
completely fail (this is the one stock falling approx. 30%). Here lies the beauty of the
market, as you have invested not more than 15% in any company and have also restricted
money in each sector to 20%. Your total loss generally cannot be more than 20% of total
investment but profit has no limits. This is how investment in stocks is a profit-making
business. Further, rates of majority stocks in the market move in sinusoidal wave of 30 to
40% from an average price in any particular window of 52 weeks.

5. When to Sell.

(a) The most difficult question to answer in Stock Market is when to sell.
Empirically each particular stock rises astronomically only for nine weeks out of 52
weeks in a year. Remaining time the stock remains flat or moves in negative and
positive in short percentages. Therefore, monitoring stock on day-to-day basis leads
to panic selling or FOMO (fear of missing out) on profit making stocks. Instead set
a GTT order (read up on this) at the profit level where you desire to book profit.
GTT should typically be fixed at more than 20% in any case and left untouched
thereafter. Thereafter, your investment app will prompt you when a particular stock
touches the set mark. You may withdraw the money at that time. But remember, if
the six parameters on the basis of which you had purchased the stock in the first
place continue to exist except increase in PE (I hope you have written them
down), then you may continue to hold the stock for longer. You never know you
have a multi bagger (stock which generates more than 100% return in a period of
12 months) in your hand.

JUST BECAUSE YOU HAVE SURPLUS MONEY –

DON’T ITCH TO INVEST IN HURRY – RESEARCH AND PURCHASE
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JUST BECAUSE YOU HAVE SURPLUS MONEY –

DON’T ITCH TO INVEST IN HURRY – RESEARCH AND PURCHASE

(b) If full equities market in general is going up and you have a stock still not
moving towards profit than it is a ‘dud’. Majority stocks even if company is not doing
well move upwards in price for nine weeks in a year. Your ‘dud’ stock will also move
up. However, it is unlikely that it would move and touch 20% over and above
purchase price. For such stocks, fix GTT order at 10% Profit and Sell it on touching
the mark. Most of the times, even a bad stock will touch this 10% mark for one day
in an year. Just withdrawn money on hitting 10 percent profit in this ‘dud’ stock.

JUST BECAUSE YOU HAVE SURPLUS MONEY –

DON’T ITCH TO INVEST IN HURRY – RESEARCH AND PURCHASE