5 Steps for selecting stocks to invest in India

Stocks, Shares, Investments, these words often bounce around us, maybe a relative boasting a sudden windfall, maybe the quiet cousin who finally found his jam in a conversation when someone mentions them, we’re all too familiar with the idea of shareholding or “the stock market” as the layman in all of us would call it.

When it comes to actual investing, however, most of us are either uninformed or misinformed, but education can be somewhat, we don’t want to say boring, but the information can get a bit bogged down. To phir kya karein? Job chhod de? Well, no need for drastic measures yet. There’s certainly some mystery surrounding the topic, well, prepare for a session in demystification with today’s post.

Picking the Right Stocks to Invest in

So you wish to begin investing or improve an existing portfolio, what is the spirit behind the investment? Go on a wild spree and include any or all shares that show the slightest promise? What exactly does the seemingly ideal portfolio look like? Would exclusivity doom the portfolio to a purge?

The answers to these questions and a few more await you in today’s blog as we take a crack at making this seemingly daunting topic a bit more understandable and not so foreign. Let's take a look at the steps involved in picking the stocks to invest in, in India.

1. Know the business

So a company and its share caught your eye, the prices look affordable, and the projections as far as you can calculate within reason seem solid. So would you buy them? Or, why shouldn’t you invest?

Picture this, two friends you know approach you to borrow some money, you know one of these friends for longer than the other, and based on just the time you know them for, which friend would you lend your hard-earned and limited money to? Another factor to consider would be familiarity, out of the two, wouldn’t the friend you are “closer” to earn some favor?

So why when it comes to a business, would you not put your money where your mouth is (literally)? No matter how disruptive or revolutionary a business could be, what you as an investor want is some years of consistency behind your stock of choice. Not only that, you want to invest in a business whose operation might not be something you’re an expert in, but should be something you understand at some basic level as this understanding affords you the ability to make an informed decision.

It is a good measure for a company’s performance if you agree with the way the business operates; think of it this way, if you were the owner of the company, would you do everything that the company does, if not, what would you do differently?

2. Understand numbers, as well as their relevance and importance

When analysing shares, numbers in various forms will present a lot of valuable information to help you make an informed decision. Some of the numerical tools at the investor’s disposal are ratios like asset turnover ratio that should be improving, and a Debt/Equity ratio of less than 1.

Other numbers and their ideal states are growth in sales and profit by a rate of 10% or greater, a gross margin of 25% or above, a return on equity of more than 20%, etc. A positive and rising cash flow, relevance, and demand for a product or service provided by the company and a well-established brand with exercisable pricing power are also preferred.

Speaking of numbers and calculations based on them, there are tools available to help crunch some of these numbers for you. Stock screeners are one such tool available at every prospective and existing investor’s disposal. A checklist to consider when applying the “filters” to find the right stock for the long haul, you can consider these as a general guideline but not some mandate set in stone:

• Growth in sales and profit of the company by ~10%.
• A market capitalisation of more than ₹500 crore.
• A Debt/Equity ratio of less than 1.
• A Return on Equity of more than 20%
• A P/E Ratio of less than 25.

It is, however, important to not go down the rabbit hole of chasing after or obsessing after the “perfect number(s)”. Shares involve an analysis of the past to act in the present while preparing for the future. The last third of the previous statement brings in an element of uncertainty which is calculated based on estimates, a fact that must be kept in utmost consideration.

3. Seek Relevant Literature

No no no, before you crinkle your noses and turn away at the thought of having to enroll in some highly technical classes. Relax, education in this context means acquiring and perusing some very easily available materials; namely the company’s annual reports, and magazines, and if you come across any topic of language that’s too new, Google bhaiya hai na! The internet is brimming with information available at your beck and call to simplify even the most seemingly daunting or alien topic.

What inculcating this habit will do is provide an understanding of your target organisation in a way that makes you not only more comfortable with the idea of investing in them but also help legitimately source important numerical data for certain calculations to make the study process your very own.

4. The Sweet Spot

Based on the plethora of information provided so far, it’s safe to say that there are a large number of filters you can apply, both numerically and personally, when it comes to selecting shares, and you definitely won’t end up with just one share that exists as the sole satisfier of these conditions.

On top of not having a stock that is zeroed in, there are post-purchase aspects that might seem not so stable or might be irksome if followed too closely. So what do you do? Do all investors just doom themselves to sleepless nights and become worrywarts? Or is there some level ground where there is some semblance of sanity?

Worry not; there exists a mildly guiding “cheat sheet” of sorts to help you pick the stocks for the long run that doesn’t have you running for the hills at the mildest of shocks. It is a path to financial nirvana that covers both ends of the investment spectrum;

The Safety of Investor’s Psych: After buying a share you will often come across information regarding said share that might perturb you, as the investor. So to protect your mental well-being, an investor should practice a few habits to make the investing process a less taxing mental exercise. Once a stock has been purchased, investors should respect their research and stick by their decision, refraining from giving in to floating myths and possible misinformation.

As far as the fluctuations of prices go, the intent of these investments isn’t to make a quick buck based on trading but to create a long-term asset that grows. Something we would like to iterate again and again is to respect the fact that while these guidelines are present to guide our readers, obsessing over these figures is not only not recommended but also would be a mistake.

5. A Qualitative about the Quantities

So after having been through such a stringent selection process, you end up with the best of the best shares, custom-fitted for you and your investment needs. Now, it’s time to pull the trigger. So buy them all, right? I mean, Itni shiddat se maine invest karne ki koshish ki hai … ki har screener ne mujhe tumse milane ki saazish ki hai!!(Speaking of screener, Ticker try kiya kya?)

But the crux of this article is not to burden the investor’s portfolio but to lighten and streamline it. Thus these filters and checkboxes are to be applied by the novice and the experienced alike to create an extremely exclusive portfolio, where any share that cannot stand these trials shall be left off your “long-haul investment ark”. Remember, less is more.

Trading in a bullish or seemingly volatile market can be daunting. Most people either sell at higher prices or refrain from investing. While all of this has been very educational (preachy, almost), it sure would be nice to have some training wheels for the beginning of the journey, right? How about having a few cherry-picked stocks to send you off? Interested? Check out the analyst desk on Investment Insights by Recipe.

The Bottom Line

This is where you’d typically hear the super fast warning that follows any investment advertisement. We’d like to present a fair word of warning, these are shares, and they do and fluctuate, but the main takeaway we’d like our readers to part with is not to fear the unknown and consider seeking the education to demystify a very real, tried and tested aspect of the monetary world.

Daro mat, Share hai!! Sher nahi!!