A beginner’s guide on How to Select Shares to Buy in India: So, you are interested in the stock market and want to invest your money to grow. Reading investment blogs, financial websites, and registering for stocks tips from brokers help you stay informed about the market. You fear taking a step further, however.
How many people do you know who lose money in the stock market when they invest blindly? The majority of them lose money because they don’t do their research first. Most Indians rely on their brokers/friends to help them choose a stock to invest in the Indian stock market. If you are looking to buy shares in India smartly for consistent returns, then you have come to the right place.
The following are 8 steps on how to select shares to buy in India that I will explain to you in this post. You can avoid loss and earn consistent returns on the Indian stock market by using this eight-step stock research process.Please stay with me for the next 10-15 minutes to learn how to choose shares to buy in India for long-term profits.
How to Select Shares to Buy in India?
“Long ago, Ben Graham taught me that ‘Price is what you pay; value is what you get.’ Whether we’re talking about socks or stocks, I like buying quality merchandise when it is marked down.” -Warren Buffett
You need to follow these eight steps to pick winning stocks to invest in the Indian stock market.
How to Select Shares to Buy in India?
“Long ago, Ben Graham taught me that ‘Price is what you pay; value is what you get.’ Whether we’re talking about socks or stocks, I like buying quality merchandise when it is marked down.” -Warren Buffett
Here are the eight essential steps that you need to follow for picking winning stocks to invest in the Indian stock market.
1. Are the fundamentals of the company strong?: Stock Picking Guide
There is a 2-minute drill that identifies companies with strong fundamentals to answer this question.. You can use this drill to identify the financially sound companies for further investigation..It is unnecessary to learn more about the company, its products, competitors, or prospects if it is not fundamentally strong.
After confirming the company’s good past performance, you can move on to the next step. You will need to review the company’s financial statements for this 2-minute exercise..As a part of this step, you should carefully note the following financial ratios:
- The growth of earnings per share (EPS) over the last five years
- Low Price Earnings Ratio (PE) compared to competitor companies and industry average
- Comparison of Price to Book Ratio (PBV) with competitors and average in industry
- The debt-to-equity ratio should be less than 1 (ideally debt*0.5 or 0).)
- A return on equity (ROE) of at least 15% (average over the past three years) is required
- Ratio of Price to Sales (P/S) – If possible, choose a smaller value
- A current ratio greater than 1 is a good indicator
- Dividends have been increasing for the last five years
2. Are you familiar with the products and services offered by the company?
The next step is to investigate the company’s business after filtering companies based on their financial fundamentals. Learn about the company’s products and services and its business model.The business model of the company must be straightforward and easy to understand.
You might wonder why understanding the company is so important.A simple example will help us understand. For example, suppose you’ll be paying 36 months’ expenses for a classmate. Afterwards, he/she will give you a quarter of their earnings..What will you choose?
Whenever you choose, you need to decide which one will most likely have a great future income. Also, will you pick a guy/girl randomly, who you don’t know?Since you don’t know that person, it is impossible for you to predict how much he/she will earn in the future. Stocks follow the same rules. You can easily decide whether to buy, hold or sell a stock at any time if you understand the stock. As a result, invest in businesses you understand.
Everybody knows and understands a few companies. A company is behind every product, from toothpaste, soaps, towels, t-shirts, jeans, shoes to bikes, cars, airlines, and banks. Invest in these companies. Without knowing what products ABC Chemicals produces, do not buy its stock.
3. In 15-20 years, will people still use this product/service?: Stock Picking Guide
Next, ask about the company’s future.. It is important to choose a company that has been around for a long time. These types of companies have a lot of growth potential, and the power of compounding is applicable to them. Don’t invest in companies with a short life span.
Would people still be using soaps 20 years from now, for example?’Yes,’ is the answer. It’s been around for over 100 years and will surely continue. Maybe the fragrance will change, but the soap will remain. Let’s look at another example. How do you feel about pen drives? How likely is it that people will still be using pen drives in the year 2025? Maybe not. You should invest in Indian stocks only if they will last for the next 15-20 years.
4. What are the company’s MOATs (or Low-Cost Durable Competitive Advantages)?
Companies with a ‘MOAT’ are worth investing in
Warren Buffet popularized the concept of MOATs. The moat is a ditch surrounding a castle, fort, or town that typically holds water and serves as a defensive feature. Similar moats surround some stocks. That’s why its competitors have a hard time beating it in its industry.
Maggi (NESTLE) is a good example! In Indian homes, Maggi has become synonymous with noodles.Colgate – a toothpaste manufacturer – is another example. As a market leader, Colgate toothpaste is the choice of people everywhere. Similar to Maruti Suzuki, Maruti Suzuki has a moat in the passenger vehicle sector. Maruti Suzuki has been dominating the Indian car sector with over 50% market share for the last few decades.
In addition, while selecting an ‘unbreathable moat’ look for such companies in which the switching cost is high. For example, Banks or IT companies.When is the last time you changed your bank account just because your competitor offered you 0.1% more interest? Other Indian companies with big moats include Coal India, ITC, IRCTC, etc.
5. How does the company differ from its competitors?: Stock Picking Guide
Identify the company’s unique selling point. Find out what this company does differently from its competitors.
Let’s examine the Indian automobile sector to gain a better understanding. A number of automobile companies are based in India. Maruti Suzuki, however, is the leading company when it comes to passenger vehicles (cars and SUVs). The Maruti brand faces several Indian and international competitors such as Tata Motors, Hyundai, Honda, Ford, etc. They haven’t succeeded in breaking the Maruti’s moat, however.
Despite the fact that it is a cost leader, Suzuki dominates due to its availability of service centers.In terms of selling price, Maruti’s competitors cannot compete with it.Moreover, Maruti’s service centers are scattered throughout the city. Even Maruti cars can be serviced easily and affordably even in small cities. If you have a FORD vehicle, you should get it serviced. Ford service centers are rare around your area. In India, people prefer buying Maruti cars for this reason. So, Maruti Suzuki can consistently increase its sales and give shareholders a great return.
When choosing a stock to invest in the Indian stock market, always consider what the company is doing that its competitors are not. No matter what your investment is, you will find many companies and competitors.Look for the company’s USPs before investing.
6. How much debt does the company have?: Stock Picking Guide
Debts are like boat holes in a company. When the boat’s hole is not fixed shortly, it will sink in the long sea and be unable to cross it.Read the balance sheet of the stock you plan to invest in before choosing it for your portfolio. A company with a lot of debt should not be invested in. Additionally, look for the non-performing assets (NPAs) of companies in the banking sector before investing. You should avoid banks with high NPAs.
7. Is the management of the company efficient and qualified?: Stock Picking Guide
Before investing in Indian stocks, it is crucial to ask this question. Management is the soul of the company. The company can prosper to new heights with good management. Likewise, bad management can result in a company’s demise.
To invest in the Indian stock market, you should research the management of the company carefully..Find out who runs the company by doing some research first. Along with their qualifications and experience, you should know the company’s CEO, CFO, MD, and CIO. The following points will help you assess how efficient the company is:
- Goals and strategies
- Management tenure
- Promoter’s purchase and buyback of shares
- Compensations and benefits for employees
- The ratios ROE and ROCE in financial terms
- Intransparency
8. What is the Company’s popularity and how often does it make the news?: Stock Picking Guide
It is based on the sentiment of the people.News of overly popular stocks influences expectations and decisions of the public.It is possible for media hype to inflate stock prices. Stock prices of such companies may fall even after giving good returns because people expect greater results from such companies.
For this reason, avoid buying stocks of such companies for easy returns. The hot stocks are more subjected to market volatility and the boring stocks are the one, which gives the best returns.
Also Read: Top 10 New Money Making Habits of Millennials in 2021
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