Women in the stock market are no longer rare: Here is the beginners guide to the share market for you to start share trading!
By Poornima Kavlekar
Before I started writing this beginners guide to the share market, I chatted with a few friends from different professional backgrounds – chartered accountant, journalist, home maker, IT professional and an entrepreneur – about their investment philosophy. It only reaffirmed my belief that many investors and especially women, are apprehensive about adding stocks to their portfolio.
There are two main reasons for this: lack of knowledge on the benefits of holding stocks, and not knowing how to start share trading. The aim of this story is to orient you with the stock market basics and help you take that first baby step into the market.
I bought shares of Hindustan Unilever in August 2004 at Rs. 118, held it for almost 4 years and sold part of my holding at Rs. 252 in 2006. My profit: Rs. 134 per share which is more than 100 % of my purchase price. Reason enough? I did two things right here. One, I bought at the right time, when the consumer story was just evolving in India, and two, held it for a long time frame. I also accumulated 4 rounds of dividend from the company.
On the other hand, I am sure you know people who’ve lost money in the market. Do not let that cloud your judgment. There could be many reasons why they lost money – bad timing of sale, wrong stocks picked or panic sale. Statistics suggest that any investment in the market, if held over the long term, works in the investor’s favour.
No doubt, there is some amount of risk – to be expected if you are going to get more than the 7 – 9 % returns that debt investments offer. However, you can decide how much risk you are willing to take by having a clear vision before you invest in the market – on your investment philosophy (short-term or long-term) and your capability to withstand sharp crashes and dips.
Getting started with a trading account. The first and essential step is to get yourself a trading account (Some examples: https://trade.hdfcsec.com/, www.icicidirect.com/home.asp). Most banks and stock broking companies offer this facility, so you could get more information from the bank you hold your account with.
Understand your risk profile. How much risk you are willing to take depends on you. Age plays an important role in determining the risk taking capability – typically, those with longer working years ahead can invest a substantial portion of their savings in equities. By doing this, you can ride out any volatility in equity markets and give your investments the opportunity to earn positive returns.
However, age need not be the only factor which determines one’s risk profile. A 35 year old might be willing to take more risks than someone who is 25. It depends on personal circumstances as well as the stock picking skills one has acquired.
Buying simply based on what others are buying or what is ‘hot’ at the moment does not make sense. These tips will help you develop a strategy right for your needs.
1. Identifying the right price. The return on your stock depends on the fundamental business management of the company and the price at which you buy. Buying a good stock at a bad price defeats the purpose.
What is a bad price? An indicator for this would be the price earnings ratio (current market price divided by the earnings per share or EPS). PE tells you how much you are paying for each rupee of earnings due to the growth prospects. If the PE of the stock is more than its industry average or what the benchmark index is trading at, then you need to think twice before buying it.
2. Look at market capitalisation. Get a fix on the size of the company you are looking at based on the market capitalisation (number of shares outstanding multiplied by the market price of each share). You can get more information on the market capitalisation of various companies at CRISIL or India Stock News.
If you are in your 20s (tolerance to risk can be high), with capital appreciation as the primary goal, you can look at small-cap (market cap of less than Rs. 500 crore) or mid-caps (between Rs. 500 crore to Rs. 5,000 crore) which have good potential to grow over a longer time frame.
Those in the 30s to 50s (medium risk tolerance) can have a mix of both mid-caps and large caps with more weightage given to large market capitalisation (market capitalisation of more than Rs 5,000 crore).
Investors above 50 years of age (low tolerance to risk) look for capital preservation. Stable companies, especially those with large market capitalisation, good fundamentals and positive cash flows, are ideal for such investors. Sectoral leaders are preferable. Consider stocks with a consistent dividend paying track record as it provides regular cash flow during retirement. Defensive stocks, from sectors such as FMCG, pharmaceuticals, are suitable for investors with less or negligible risk appetite.
3. Build your portfolio gradually. Ensure that the stock has reasonable trading volumes. Watch out for companies that make reasonable disclosures, have operating profit margins, generate constant cash flow and have a return on equity of above 10 per cent. Avoid companies with low floating stock or high management stake. More importantly, buy a stock only if you understand its business.
Once the stocks and sectors have been identified, a staggered approach to building the portfolio is best. Investing in a phased manner, over a 6-12 month period, will help you gain confidence. Remember to build a well-diversified portfolio, and have a reasonable number of stocks, say 10, in it.
4. Fix your time frame. A very important criterion for equity investment is to understand the time frame of investment. If you are a long term investor, then do not lock in your short term funds. If you are a short term investor, your risk level is higher. Investors with medium to long term horizon (definitely more than one year) should have sound reasons for investing in the company.
5. Review your portfolio. This should happen, preferably, once a month. The markets are very dynamic and with many changes happening at both the micro and macro level, it is important for a do-it-yourself investor to remain alert and reshuffle the portfolio, if needed. Follow the quarterly results and read up regularly on the company and the industry you are invested in.
You’re now set to take your first step into the market. Research every stock you plan to buy and avoid buying simply because someone else is doing so. Happy Investing!