Set your financial goals and strategy
One of the first things to do before investing in the share market is to be clear what your goal is in terms of target revenue as well as frequency of trading. It will help you stay calm and disciplined when every other trader is panicking at a bear market or getting greedy seeing a bull market.
As a new investor, the allure of making big money fast can be exciting. Rather than looking at it as a way of saving your money efficiently to beat inflation and grow slowly and consistently, it is seen as a platform to gamble and make windfall gains.
Anyone that has made money from the stock market has done so but by being consistent, strategic, and investing in companies with strong fundamentals. Investors that participate in day trading, also known as intraday trading, may make huge profits in the short term but the downside exposes them to huge risks as well. Professional intraday traders are experts at trading. They possess an in-depth understanding of market trends and stock movements. As a novice in the stock market or someone who doesn’t deal with the financial markets for a living, it is potentially better to stay invested in stocks and mutual funds for at least 5 to 7 years.
Tips for growth investing in the share market:
- Look at P/E and PEG ratio: Growth companies have a high P/E ratio. The P/E ratio is the market value per share/earnings per share. Higher the P/E ratio means a higher price investors are willing to shell out for a share because of growth expectations. However, in some cases, this ratio may not truly show the health of a company as it might just mean that the business is overvalued because of inflationary tendencies or a boom. The price-earnings to growth (PEG) ratio should be looked into apart from P/E ratio. The PEG ratio is market value of share units/earnings per share growth rate. This accounts for annual rise in the company’s EPS.
- Look at growth in sales: Track rise in sales for any specific quarter when compared to the same quarter in the earlier year. This tells you how a company is growing year on year. Quarterly growth in sales followed by consistent annual growth ratio wherein growth rate is rising each year shows that a company is in good financial health and is offering new products/services or diversifying its business or is tech empowered, among others.
- Focus on company’s EBITDA: EBITDA is earnings before interest, taxes, depreciation and amortisation, and looking at a company’s EBITDA year on year shows its operational profitability, ie, the amount of cash it is generating from the business.
- Look at the growth in net profit: If the company has shown growth in net profit year on year, it means that it has been able to generate profits once all the expenses have been deducted from revenues. This is an indicator that the company has a strong market for its products or services and is on a growth path.
- Track earnings per share: Companies that qualify as growth firms should show a strong growth in earnings per share over the years, at least over the last five to ten years. The premise behind looking at EPS is that if a company has shown a high growth in the past, it will in likelihood show a good growth rate in the future.
- Watch out for earnings announcements: Earnings announcements are made every quarter or year and made on particular dates in the earnings season. Companies make public statements on their profitability. Before these announcements, companies also release estimates made by analysts. As a growth investor, you would need to pay close attention to these estimates as they show if the company may grow at a rate faster than the average growth of the industry it is in.
- Avoid borrowed money for investment: Borrowing money from your stockbroker to invest should be avoided at all costs. In the short term, the stock market can be extremely volatile. Money borrowed to invest with your existing stock holdings as collateral could leave you with nothing if things don’t go as planned. To make use of lucrative investment opportunities that present themselves, keep a fund available at hand to strike when the iron is hot.
- Diversify your stock portfolio: One of the most important rules of growth investing is to diversify your portfolio. This applies to all investments but becomes all the more important if you want to invest in growth stocks. Make sure not to have all your eggs in the same basket especially in growth investing. You could have five to ten stocks depending on whether you are a small investor or a fairly moderate one. However, in the initial years, stick to sectors that are safe, especially ones that you understand.
- Finding the right broker for yourself is extremely important. Pay attention to commissions charged on transactions, costs associated with opening a Demat account. Regularly look at statements shared by your broker to keep a pulse on the performance of your stocks. Small brokerage costs can add up over time. Paying attention to the tax liabilities on profits earned through stocks essential to not eroding the value these investments generate. Having a good broker to guide and advise you is critical.
- Start early, start small, start strong: Like all financial instruments, share-investing works best when aided by the power of compounding. For compounding to work its wonders, it needs time on its side. However, your enthusiasm to trade may get hampered by early losses (that are bound to happen at some point). In order to overcome such fears, start investing with a small amount, experiment with the market and slowly increase your investments over time. In order to minimise losses, make sure you have the basic concepts of markets, economics, and financial instruments clear before investing. Preferably, use as much technology and take as much expert help as possible in your early stages.
Share markets require years of practice and simultaneously, hours of fundamental and technical research. Now that you have the basic share market investment tips, it is time for you to open a demat account with a trusted broker like Angel One and start investing.