Equity Investing Strategies for Beginners

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With the Nifty scaling peak 10,000 points, a lot of Indians are now opening up to stocks as a form of investment. After all which other asset class can offer 30%+ YOY for decades together? Neither do you have to pay taxes on profit earned & neither do you have to bother about the long waiting time required to sell the asset as in case of other investments especially real estate.
The Opinionated Indian spells out a relatively fool proof way of doubling or probably trebling your investments through stocks. Unless there is a major catastrophe or a black swan event, you can rest assured that with strong fundamentals in place, our economy is poised to grow at fast & steady pace in the coming years. This will have a positive impact on stocks listed on Indian bourses.

The two golden rules of Equity Investing are

1) Buy Stocks Like You Buy Grocery: Experts advise that one should buy stocks like one buys grocery ie buy stocks from all categories. Your stock portfolio or your basket in this case should consist good stocks from all top categories. The lesser you diversify the higher is the risk. On the other hand, diversifying into several categories may lower your returns in some instances, but will protect your investments during a severe meltdown of markets.
2) Buy Low Sell High: Warren Buffett – The golden rule of equity investing is to “buy low & sell high”. Although it is easier said that done, we have found through our own experiences that patience & suppressing your urge to buy stocks when markets are peaking or selling when the markets have crashed go a long way in growing your wealth through stocks. One needs to check the PAT growth/ de-growth or top line growth/de-growth vis-a-vis the previous year & compare it with the stock price increase/decrease, before investing in those stocks. Even when the markets are peaking, there will be a few sectors or a few quality stocks whi are facing temporary issues. This is the best time to invest in those stocks.

Based on the above two rules of equity investing, please find below the ideal composition of a stock portfolio
1) Defensive Stocks: Stocks which give comparatively give lesser returns, but are better at protecting your investments during market crashes are called as defensive stocks. These stocks are BSE – 100 stocks, who are generally from FMCG, Pharma & IT categories. Ideally one should allocate 40% -60% of their investments to defensive stocks. ex. HUL, RIL, ITC, TCS, Infosys, Cipla based on their risk appetite. It has been observed that defensive stock prices perform better in bearish market conditions.
2) Mid-Cap Stocks & Large Cap Stocks from Other Categories: Mid cap stocks ie stocks which are not listed on Nifty or Sensex. They have a market capitalization of INR 50 billion to INR 200 billion. Although riskier than large cap stocks, mid-cap stocks give much better returns than large stocks. Large cap stocks have limited scope for growth as compared to mid-cap stocks & hence mid-cap stock returns tend to be higher than large cap stocks. Large cap stocks from PSU banks, finance, real estate categories too have given decent returns over the years & should be a part of your portfolio. Bajaj Finance, SBI, PVR, Edelweiss Finance etc are good stocks from the mid-cap segment.

3) Small Cap Stocks: Small Cap stocks are the relatively unknown stocks, which have a market capitalization of a few crores. These stocks are high risk & offer high rewards. You may end up losing your entire investment on these stocks. A relatively safer way to make money of these stocks is mirror the investments of ace investors like Rakesh Jhunjhunwala, Porinju Veliyath, Dolly Khanna, Radhakrishna Damani etc. These investors have a team of people who research & run background checks on small cap stocks. Hence the stock prices go up on news of these investors picking up stake in them. we would suggest not to invest more than 10% in such stocks.
4) IPO: A good way to make money in stocks is to invest in good IPO’s. IPO’s like D-Mart(Avenue Supermarts), Mahanagar Gas, Thyrocare etc have given 2X returns to their investors in a short span of time. The deal breaker of investing in IPO’s is that the stocks are allotted through a lottery system. A select lucky few will be allotted the shares, whereas the others will have to buy the stocks post their debut at the market. Good IPO’s always tend to be over-subscribed.

Invest in stocks only when are you sure of staying put for at least 3 years. It is necessary that the stock you are investing in has strong fundamentals. Have a look at the Profit after tax growth, the company’s debt-equity ratio, their cash reserves, the category which the company is from & the company’s annual reports before investing. A good sign of a stable company is when the promoters are investing more money in the company’s stocks. Since the promoters are well versed with their company, a promoter pumping more money into his company is hence a good sign. Do read what the top execs of the company have to say about their company or their company’s category in their interviews to get a good idea of where the company is headed.

Do not believe in tips you receive through random SMS’s or mails, especially if you haven’t paid for them. These SMS’s are mostly sent by the company itself, to inflate their stock price. Like they say, “There is nothing called as a free lunch in this world”.

Do not forget the fact that, only the brokers make money when you are buying & selling stocks too often.

Do write to us at theopinionatedindian@yahoo.com

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