Beginner: Share and Stock Market

Tips for first time investors in Stock Market

If you wish to invest in the stock markets and know nothing about them, one convenient way is to opt for mutual funds. If you are keen on investing directly, then do allocate the necessary time, energy and resources.

Show commitment

First, spend time on understanding a company's fundamentals: sales, net profit, margins, etc.

Also study speculative markets, because sentiments play a major part in driving stock prices. Sentiments in turn are driven by expectations of what will happen in the future.

Have a long-term horizon

Like a company shareholder, give your investments time to grow. Enter the markets with realistic return expectations, and not outrageous ones. Remember that time is the best antidote to risk: the longer your investment horizon, the lower the volatility of returns.

Keep emotions in check

Do not turn euphoric when the markets surge, nor become despondent when they plumb new lows. Even if you develop a well-researched, diversified portfolio and hold it for the long term, inevitably some of your stock holdings will turn out to be duds. When that happens, respond based on your training and intellect, rather emotionally.

Be prepared to interpret data

While institutional investors have access to expensive databases, you will have to depend on publicly-available information. Quarterly results, annual reports, and shareholding pattern are available on NSE and BSE's web sites. Scout for more information in the media, and on Google Finance and Yahoo Finance. Technical market data like share prices and volumes is available on company web sites, and old research reports on brokerage houses' sites.

Analyse, then buy

Analyse the company with the same level of rigour as you would if you were the owner. Initially stick to sectors that you know best. Doctors, for instance, should invest in pharma companies first. Compare a company's ratios with the index and industry historical averages. Look for the following ratio-based characteristics in a stock you are keen on: low PE, low PB, high dividend yield, low debt to equity ratio, and high RoCE and high RoNW.
With the markets split between good but overvalued stocks and poor but undervalued ones, here are a few ratios you should look up before you buy.

1. PRICE TO EARNINGS RATIO

The most commonly used ratio, it compares the price of a stock to the company's earnings per share (EPS). The EPS can be either for the past four quarters (historical or trailing PE) or for the coming four quarters (forward PE).

PE = Stock price/ Earnings per Share

2. PRICE TO BOOK VALUE RATIO

This ratio compares the price of a stock with its book value. The book value is the net value of the company's total assets minus its liabilities. In other words, it is what shareholders will be left with if the company goes bankrupt.

PBV= Stock Price/ Book Valued per Share.

3. PRICE TO SALES RATIO

This ratio compares the price of a stock to the revenue earned per share. The revenue for the past four quarters is used in this calculation.

PS= Stock Price/ Revenue per share

4. DEBT-TO-EQUITY RATIO

It measures a company's leverage by comparing its debt with its equity base. The ratio indicates the proportion of the company's assets that are being financed through debt.

Debt Equity R= Total Long Term Debts/ Equity Shareholder

5. ASSET TURNOVER RATIO

The ratio measures the sales generated for every rupee worth of assets. It shows a firm's efficiency in using its assets to generate revenue.

Asset Turnover Ratio=Revenue/Total Assets

Buy, monitor, sell

Since monitoring many stocks becomes difficult, stick to 15 or 20. If derived from diverse sectors, that many stocks offer adequate diversification. Monitor your stocks' fundamentals and valuations at least once every quarter. Sell only to meet a financial obligation, to rebalance, when fundamentals deteriorate, or when the stock becomes overvalued. Also, sell if you can replace one with a better option. Adhere to these basics and you could well surprise yourself with your performance

Sources: ET