Raghunandan Money – Investment Khushiyon Ka.

As a beginner how to pick stocks for investment in India

Published : October 31, 2019

How to pick stocks for investment in India - a beginners guide

Investment is a long term process. It requires some special skills mindset to get success in investment decisions. When it comes to stock investment, it’s obvious that you should know the mechanism of how stocks and the stock market works. Afterward, the crucial step is to pick stocks for investment in India.

Now as a beginner you must be asking yourself, even before you think to figure-out stocks to put your hard-earned money in, that why you actually want to invest in a stock. Here are some good reasons you must understand and make yourself clear before you start digging into companies to pick one or some for yourself. 

Why do you need to invest in stocks?

You might be wanting to get yearly returns over and above that from any bank fixed deposit schemes. Or, you might be planning to park your spare money to achieve some of the goals that might arise in the future, like, planning for retirement or education or marriage of your kids.

Alternatively, some of us may be desiring to get decent regular income while keeping our money growing at some pace. While sometimes it is also possible to invest with an intention to be a proud owner of a company.

So, first and foremost you should fix your mindset towards your goal. You know the best thing with stocks for investment is that you can have multiple goals set at a time which is achievable also. 

Why do you need to be extra cautious while picking stocks for investment?

Before proceeding on discussing the strategy to pick stocks for investment as a beginner to investment world a word on why you need to be extra cautious with your investment in stocks

As a beginner, you might be fascinated with the idea that it is the quickest way to get rich, which may be right at some point. But remember, things may get wrong if you are not always cautious with the strategy or a plan to make your ride smooth.

Investment in stocks is riskiest among alternatives, and it is a fact that you should always remember.

This is the kind of investment that can fetch negative returns as well. It means that the value of your investment may go below your initial buying price if things go wrong. If such a thing happens, will result in loss.

However, it is also a fact that every risk you take in your life comes with a reward, and so is from investing in the stock. Of course, you need to be patient with your investment strategy and trust only yourself in any such decisions.

Pick stocks for investment, whose business model you are familiar with

So far so good, now that you understand your purpose well for investing, the first lesson for picking a stock for investment for the first time is to pick a company whose business model you are familiar with. Only go for a company share whose product or services line you know well.

Never-ever try your hand on just any business just because someone told you to get some extraordinary returns.

If you don’t understand the business take some time to acquaint yourself with the business you plan to go with. Remember, the only road to riches in the stock market is to learn and then to implement it in the right way. 

For instance, if you understand technology, or for companies in the IT sector, if you understand the business of vehicles go for the auto and auto ancillary sector. Agriculture, infrastructure development, medicines, healthcare, etc. are some other business ideas you might interest in.

The bottom line here is that before you pick any stock, please understand the business in which the company is, well before doing so. This will not only help you understand where the company stands right now but also where the company headed in the next few years.

Thus, the pain you take in understanding the company before buying a share of it, will for sure going to reduce some of the future risks associated with that company. 

How to screen companies for your stocks portfolio?

Secondly, after screening a business that you are comfortable with, you need the listed companies that you want to screen. There is two simplest way to do this as a beginner.

You might be aware of sector indices and sector-specific mutual fund schemes. These are two important sources of well-performing stocks in a particular business sector. I will discuss both one-by-one here for you all. 

i) Selecting stocks on sector indices basis

Sector indices are composed of well-performing stocks. The constituent stocks are added or removed from these indices are based on their quarterly financial performances. So to begin with, you will not need to deep dive into the financing of such companies to scrutinize them as a candidate for your portfolio.

ii) Selecting stocks on sector-based mutual funds

Similarly, different funds managers regularly keep adding or removing stocks from their ongoing schemes portfolio in order to generate good returns for their unit-holders. These mutual fund schemes have to publish their monthly holding due to regulatory requirements.

What you need is to pick some historically well-performing sector or industry-based mutual fund scheme and compile their holding data over the last couple of months in order to understand which companies these fund managers are buying and which they are excited to keep the scheme performing. 

Diversify your money into more than one stocks

These preliminary screening will give you a probable list of companies, which you need to refine. Remember, investing in stock is considered riskiest, so a piece of advice at this junction. Never put all your money in a single stock or a few stocks from the same sector or industry.

Diversification of money in different stocks from different industries will help you diversify your risk to some extent. The logic here is that, if one sector is not performing at a time, it is not necessary that another sector is also following the suit.

So, if any stock from one industry might not be performing good, and at the same time, some other stock from another sector might be performing well during that time, hence neutralizing the fall in the price of the earlier stock.

The understanding of portfolio theory suggests that investment in more than 4 stocks of companies from diversified filed always helps optimize returns over a period of time.

A portfolio of 4 to 6 stocks from the diversified field will be good to start with. Always remember that while diversifying does not diversify to complement sectors. For instance, the cement and iron and steel sectors complement the infrastructure sector.

The slowdown in one sector will adversely affect the complement sector as well. So, do diversify to non-complementary sectors. It is also good to have at least one stock from the defensive sector. The defensive sector is those which falls less in a situation of the overall economic slowdown. Hence, cushioning the returns from the overall portfolio.

FMCG and health-care sectors are the best examples of the defensive sector. 

Picking the right one from the bunch of screened stocks

Now you understand how to start picking stocks for investment. Next, you will need to know how to select one that suits your long term needs.

The time tested method for the company to be a potentially generating good return overtime is that the company should be debt-free or having a very low level of debt.

Various studies have also suggested that debt-free companies perform better. Better from that of the company having a large number of debts in a given sector. So from the list, you need to generate from the above method.

Next, you should look for the following companies – 

i) Companies that are either hypothetically having zero debt, or

ii) A very low level of that among their peers. 

Zero debt or a very low level of debt simply means that the company is having free cash. This free cash they might use for further business expansion. Or even may accumulate it in the company’s reserves and use in the future expansion of the business. This is a very good indication for small retail investors.

If you are able to pick a company stocks for investment with zero or low level of debt. Not only that but also during their initial phase of business expansion or during the economic downturn. Then the probability to get a higher return over a period of time will become quite high.

Today I will be concluding my discussion here only. Further, I hope that these broader guidelines will certainly help you set up a long term portfolio. The portfolio of good and diversify stocks for investment that might help you in achieving your future goals.

About Author

Naresh Kumar Sharma
Naresh Kumar Sharma

Naresh is the head of Research at Raghunandan Money. When it comes to studying the markets, Naresh is someone loves decoding prices, data, trends & charts. Naresh carries an equal flair for both technical and fundamental analysis and that makes him truly one of the reliable experts in the market. Naresh writes informative articles & blogs for equity, commodity, traders and investors.

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