Beginners Guide to Investments in Stocks

If you have decided to invest in stocks, the next big question is how do you go about the process of investing in stocks? Investing is easier said than done because when it comes to investing you are putting your own money at stake. Euclid had said that there is no royal route to geometry and similarly there is no royal route to investing. However, here is a methodical process you can follow before investing in stocks.

Decide whether you want to participate directly or indirectly in equities

Most of us realize that equity investment is a must for creating wealth in the long run. But for a lot of investors, the entire job of selecting stocks and monitoring them looks quite intimidating. An option for such investors is the mutual funds route. You can either go for lump sum investing or for SIP. The idea is that the fund manager takes the decision of what to buy and what to sell. Effectively, the investor gets a combination of diversified portfolio and expert management. Of course, if you are comfortable with direct equities, then you can surely open demat account and go for online trading.

Open demat account and a trading account

That is the first step if you want to directly invest in equities. Firstly, you must select your broker and for that you can rely on investor reviews or you can go by the market perception on the best broker. You need to do some basic documentation for account opening like submitting your proof of identity and proof address, uploading your PAN card, signing the trading and demat agreement with the broker / bank etc. Once all these documentations is in place, your trading account will be opened. The process takes about 4-5 days for offline account opening while online account opening can happen in just one day.

Get to grips with stock markets

Get familiar with income statements and balance sheets and concepts like EPS, P/E ratio, P/BV ratio, dividend yield etc.  You will need to use these ratios frequently when you are investing. Also be clear that you need to do extensive homework before investing because the best investors are the ones who are most prepared. Don’t spend too much time listening to analysts and traders on TV channels. Rather spend time with balance sheets, reading news wires and learning the nuances of technical chart reading.

Get a hang of online trading

Even if you think that you are clumsy with the computer, you must get to grips with online trading. That is the future. Ask for an online trading account when you fill up your trading account opening form. Once you receive the trading kit, use the user name and password to activate the online trading account. You must get familiar with the process flow of online trading from end to end before you start trading. Online trading gives you much better control and lower cost of trades. You must make the most of it.

Get down to selecting stocks

Whether you are an intraday trader, short term trader or a long term investor, you need to be an expert at stock selection. First decide the universe you want to track. You don’t need to worry about all the 4500 stocks listed on the BSE. Limit yourself to 50 Nifty stocks and 50 stocks from the Nifty Next-50. That is a good universe to start with. Remove stocks that are too volatile or too static. You cannot make money on either of them. Then develop your own approach of how to read and interpret financials, news flows and technical charts for an identified short list of about 25 stocks. Don’t track more than that.

How to frame your investment strategy

What is the approach you want to take as an investor? If you are a trader, your focus will be more on momentum and short term churn. But if you are an investor, there are a lot of serious questions you need to ask yourself. Will you follow a top down approach or a bottom-up approach? Will you stick to growth investing, momentum investing or value investing? Will you commit funds for long term futuristic ideas and if so what share of your overall investment portfolio. How will you hedge your portfolio in turbulent times? All these form part of your investment strategy.

Understand stop losses and profit targets

If you are a trader then stop losses and profit targets are your life line. You must not even imagine getting into a trade without a stop loss and profit target. Even if you are an investor, you cannot afford to risk all your capital on a few bad trades. Hence you must have a mental price target and a level below which you will not hold the stock. Of course, if the stock is showing a lot of momentum then you can have a trailing stop to make the best of momentum. But the moral of the story is that stop loss and profit targets are a necessary part of investing discipline.

How to monitor stocks and when to sell

How to monitor your portfolio and why to monitor your portfolio? Basically, you need to take decisions and that is only possible if you monitor your holdings. You don’t make money when you buy a stock but you only make money when you sell the stock. Booked profits is always more exciting than book profits and you should keep looking at opportunities to monetize the market movement. For that you must monitor the news flows, the industry level news, macro news and the chart formations. 

Keep a trading diary

Last, but not the least, keep a trading diary. What exactly is a trading diary? When you trade, you will get some trades right and some wrong. That is part of the game. Trading diary is about evaluating at the end of each day; what you did right and where you went wrong. As you document your experiences in the trading diary, it becomes part of your investment learning process. This is one of the most important steps for you!