In the previous post of Beginners' guide to Stock Market - Tools, we have covered the aspects which will help you get started with your journey in the ocean of the stock market. In this section, we will discuss the logical aspects, fundamentals, strategies, and many more.
I want to give a disclaimer that this topic being very vast, this post is limited to my knowledge and practices and everyone should do their own research and study before making money-related decisions. With that said, let's get started.
The Economy
When we talk about Japan ($4.8trillion) or the US ($19.48trillion), these are developed nations and their current objective is to sustain the economic growth. Compared with India which is a growing economy where the current GDP stands at $2.65trillion, we have a long way to go. Naturally, the rate of growth of developing nations is comparatively higher as compared to the developed nations. Given some exclusion, the majority of the top companies in these developed nations have a growth rate of low to mid-single-digit in percentage terms when compared with India where the growth rate is in the range of high-single to double-digit in percentage terms. Given the above logical explanation, I want everyone investing in the Indian stock market to keep a bullish view. This will help you to remain positive about our economy for wealth creation in the long term.
Approaching the Stock Market
Stocks are a high-risk high-reward investment market. As you jump right into the pool bombarded with hundreds of lucrative options and tons of overnight success stories you need to first make up your mind. The first step is to control your nerve and avoid buying into others' recommendations. You will always feel insecure if you buy into someone else's idea and end up spending sleepless nights. The best way to avoid this is to do your own research but before that, you need to establish some facts. I personally take a rational approach to my investment viewpoint.
Look at all the investment opportunities you have and understand the target returns on an annual basis:-
# Savings bank account offers 3-4% returns
# Fixed Deposits offers 6-7% returns
# Employee PF and Personal PF offers 7-8% returns
# Mutual Funds offer 10-12% returnsAs you can see from the above list, you can make a fair judgment that you should be able to make approximately 12-15% returns from your stocks investment annually by staying conservative and not thinking over-ambitious.
You need to register this number in your brain so that it is on top of your mind to be able to make the right decisions on this journey.
A technical term I would like to engrave in your mind at this point is CAGR (Compounded Annual Growth Rate) which means how much return a stock is giving every year on an annualized basis. Your eye should be on the stock which has CAGR of 12 and above.
Choosing the Right Stock
My personal definition of this term is not the stock which skyrocketed 10% today but the stock which has been consistently giving high returns year on year. The best classification of such good companies is NIFTY100.
The definition as per National Stock Exchange website NSE is given below and it is pretty much self-explanatory
NIFTY 100 is a diversified 100 stock index representing major sectors of the economy. NIFTY 100 represents top 100 companies based on full market capitalisation from NIFTY 500. This index intends to measure the performance of large market capitalisation companies. The NIFTY 100 tracks the behavior of combined portfolio of two indices viz. NIFTY 50 and NIFTY Next 50Here is the list of all the NIFTY100 stocks.
So now you have the list of 100 stocks which you can safely pick knowing the company has a good history which also, in turn, reduces your overall risk. If you want to further reduce your risk then go for NIFTY50 stocks which has a further tailored list of top 50 companies.
Diversification
The stock market comprises of many companies that are part of various sectors such as IT, Pharma, Auto, FMCG, and so on. When choosing the stock, think about the specific sector where this company belongs and research about these sectors' future outlook. Also, ensure that your portfolio is balanced and contains stocks of different sectors to bring down the risk of specific sector turmoil. As I am writing this blog during COVID times, the pharma sector is performing upbeat but before the pandemic, they were just doing average while the Auto sector is in pressure as the sales are limited hence understand various factors that can affect your returns in the stock market. The simple strategy would be to not keep all the eggs in one basked.
Note that diversification does not mean buying 100 stocks of each sector. So keep the size of your portfolio between 10-20 high-quality stocks.
Investment Tenure
While the returns in the stock market can be very lucrative, your commitment to a certain company defines your mindset and loyalty. Your loyalty is best determined by how long you can remain invested in a fundamentally strong company not only when they were giving outstanding returns but also during their rough phase. Some may disagree with this but I am of an opinion that I will remain invested in a good company even after I have achieved my target of 12-15% of an annual return unless I find there is no positive outlook in long term. Additionally, by staying invested for more than a year accounts for lower taxes.
I would encourage everyone to remain invested in the stock of your choice for more than a year and I am sure Warren Buffet would agree with me. :)
If you see that the stock of your holding is available at a lower price then you should continue to accumulate further to bring down your average price.
Now that you are gaining confidence in this area, its time to start looking at various ways of shortlisting the best stock of your choice, and that will be covered in the next post of Fundamental Analysis.