How to invest money in the stock market
Step 1: Learn the basics of finance and accounting. Make sure you know how to read a balance sheet and profit and loss statement. Make sure you understand key financial ratios like PE, PB, etc.
Desired Outcome: You should be able to identify the financial health of a company by looking at the financial statements.
For example, you should know the year on year and quarter on quarter revenue growth of the company, year on year and quarter on quarter profit growth of the company, some important financial ratios like PE ratio, PB ratio, etc.
Time Required: Around 15–20 hours.
Step 2: Now, you need to pick an industry of your knowledge or interest. Read all the recent news about the development in the industry.
Desired Outcome: You should be able to understand the macro environment which is not within the control of the company but impact the company directly or indirectly. For example, government policies, crude oil prices, etc.
For example, if you pick banking then you should know about Bad Debt and the impact of recent RBI policies on the banking sector.
Time required: Around 15–20 hours to begin. This will be a continues process to keep yourself updated.
Step 3: Shortlist the companies from the industry of your knowledge or interest
3.a) Shortlist the top companies/ market leaders in the industry.
For example, HSBC in banking.
Time required: 5 hours
3.b) Look around and identify the product/services you love. For example, a lot of people started wearing Jockey in last 10 years. We all love it. Now, look at the company which sell Jockey. Page industries share price was around 450 in the year 2008. Today it is around 30000 in 2018. That's around 70 times return in the last 10 years. Can you find any other company today with great future potential? Think about it...
Step 4: Open a trading account with ZERO brokerage. Why pay a brokerage on every transaction when you have the option to invest your money for free.
Time required: Few days from document verification to account opening.
Step 5: Start slow. Do not invest a lot of money together. Keep following the stock and industry and keep learning. Observe how the stock behave when the market is good and the real test is when the market is bad. Nobody can make perfect decisions. Stock market investment is not a fixed formula but it is a combination of experience with knowledge.
Things to keep in mind and mistakes to avoid
- Always go with blue-chip companies ( top companies with a proven track record). Do not but penny stock or cheap stock. Most of the penny stocks fail.
- Do not buy any stock based on advice from TV experts, friends, etc. Do not join those trading groups on Whatsapp and Facebook. They are all speculators and not investors. Always do your own research and buy on your research.
- No not get greedy and never go for day trading. Always invest for long term. Always remember that you can't double your money in a few months. You need to have PATIENCE.
- Read good books on investing: Start with "Avoid Loss and Earn Consistently in the Stock Market by Prasenjit Paul". An excellent book for the Indian context.
- Do not invest all your money in one company. Try to diversify your investments. However, do not diversify a lot.
- Only invest in a business which you understand.
Hope it helps.