Starting Investment in Stock Market

“We discussed different types of accounts that are required before one can start investing in the stock market, we also discussed how trade gets executed during our last discussions”, said Apurva. This time, occasion was “Bhaiya Dooj” last day of the Diwali celebrations which glorifies the brother-sister love all over in India. It was first time after two years for me, where we were celebrating this day with each other. Last two years, I was at Campus pursuing my MBA and this time it was a very special day for me to celebrate the festivals of lights at my home with my family. “So how does one go about selecting the stocks they would buy, and how do they decide whether it would be right time to sell”, asked Apurva. “If everyone knew the secret of buying and selling the stocks at the right time, then everyone would have made profit in stock market, but in fact this is not the case. Many end up making losses, in stock market. It has everything to do with the approach with which you enter stock market”, I started explaining her.

First of all one needs to understand the difference between “Investment” and “Trading”. People often tend to use one term for the other. It is important to understand that these term are related to horizon of the buying and selling. “Investment” is often long term and “Trading” is short term. Definition of Long term and Short term varies based on the holding capacity, risk taking ability of the individual but anything less than 1 year does not qualify as Investment. Ideally experts will tell you that if you want to invest in stock market then you should give at least 2 to 3 years for your investment to realize and give you returns. For any trade which is realized before one year, i.e. if you buy a stock and sell it before one year, government levies, a short term capital gain tax which is 15% today. 

They are different categories of investors, which predominantly can be classified into Retail and Institutional investors.  Institutional investors refers to entities who are not individual. Retail investors are people like you and me who invest in stock market. But there are some retail investors who are full time into stock market, trading is meant for them. For retail investors, who do it part time to get more than average return on their hard earned savings, Investment is the only way to go.As for deciding which stocks to buy and when, there are different approaches with which one can decide as to which stock he/she would want to buy and at what time, what levels of the stocks. 

Fundamental Analysis:

Fundamental analysis is more academic way of analyzing stocks. Most of the time it works top down, i.e. from Macro Economic to Micro Economic (Specific) factors. So for India, Macro Economic Factors would include political stability of government, Governments budgetary provisions and its ability to achieve those, Growth prospects of India as country, Sectoral reforms, regulatory environment affecting those sectors, Interest Rate outlook etc.

This is not limited to India alone, in today’s world of “Global Economy” it is also important to look at the Global Economic Indicator as well, which has direct and indirect impact on Indian Stock Market. E.g. Interest rate changes in US will impact Indian Stock market as well, if china does not do economically well this will affect India Stock market because some of the companies in India may be importers of raw material from China.

Stock markets are most of the times considered as efficient, meaning current information will get adjusted in value of the stock as soon as it is public. And for retail investor like you and me it would be almost impossible to capture the impact of the information which gets incorporated in stock prices in seconds, sometimes in Nano seconds. Hence analysis these factors would mean analyzing them from futuristic point of view.

Fundamental analysis would also include analysis of the company as a whole, i.e. from Micro Economic point of view. This includes analyzing company’s Financial Statements that include, Balance Sheet Statements, Income Statements, and Cash Flow statements. It also includes analysis of the fundamentals of the company’s suppliers and customers. As we discussed already, all the information available in public domain will get incorporated in the stock price almost immediately hence we need to understand this from futuristic point of view.

E.g. For analyzing an Automobile maker, we need to check what will happen to price of Steel, has government increased/or there is a possibility of increase in import duty of steel? Steel is one of the most important raw materials hence will have a major impact on stock price. Also what will be inflation in coming future , will RBI lower interest rate so that it makes buying car easier, so that more number of cars will be sold and hence more profitability. Is a Diwali season, New Year coming up, because people in India tend to buy vehicles on auspicious days/seasons? Is US central government likely to raise interest rate which will mean that foreign investors will take away money from India putting a downward pressure on Indian Stock? How much % of stock of this automaker are held by foreign investors? There are many more factors that can be considered. It is also important to find out the weightage of these individual factors as each of the individual factors will have different impact on stock Price.

Technical Analysis

Technical analysis is different from fundamental analysis completely. As we have learnt already in stock prices that there are many factors that will determine the stock value. But these factors do not change on daily basis, but stock price does. Why is it so? This is because, in short term the stock prices are more depended on supply – demand principle. Technical analysis includes identifying different patterns in the stock movement through charts and is basis on the principle that these patterns have predictable meaning and historically this predictability has been confirmed. Hence Traders, will use the price patterns to figure out when to buy and sell the stock.

As we discussed, people like you and me should be investors rather than traders. Having said this it would be ideal to use combination of both fundamental and technical analysis. Fundamental Analysis to choose a stock from long term point of view and technical analysis to choose the exact timing. Easier said than done!! “I now know the approaches to invest in stock market, but I think I will take some time, may be years to perfect the art of fundamental and technical analysis. Does that mean, one has to wait to perfect the art before he/she can start investing? ”, asked Apurva. “Not necessarily, this is applicable only if you, yourself want to invest in stock market. But there are other means such as mutual funds, portfolio management services through which you can invest in stock market indirectly. Let’s discuss that next time”.