{"id":3921,"date":"2020-03-15T20:15:42","date_gmt":"2020-03-15T14:45:42","guid":{"rendered":"http:\/\/capitalante.com\/?p=3921"},"modified":"2020-06-14T11:16:10","modified_gmt":"2020-06-14T05:46:10","slug":"how-to-make-money-in-the-stock-market","status":"publish","type":"post","link":"https:\/\/capitalante.com\/how-to-make-money-in-the-stock-market\/","title":{"rendered":"How to make money in the stock market"},"content":{"rendered":"
Historically, the equity asset class has outperformed all other asset class i.e., debt, gold, bond, etc. in the long run. So, it is quite clear that you can invest in stocks via either direct equity by opening a Demat account or mutual fund. Both the investment strategies enable an investor to beat inflation as well as generate better returns in the long run. In this column, we will discuss how to make money in the stock market.<\/span><\/p>\n While investing in the stock market you should consider two points, the time horizon i.e., short term or long term and the risk appetite i.e., moderate or high.<\/span><\/p>\n According to one famous investor of all time Benjamin Graham, the stock market behaves like a voting machine for a short-term where someone goes up for sometimes and later someone else goes up beating the first one behind. On the other hand, in the long run, the stock market acts like a weighing machine that has only one option left to move upwards.<\/span><\/p>\n “In the short run, a market is a voting machine but in the long run, it is a weighing machine.” – Benjamin Graham.<\/span><\/strong><\/p><\/blockquote>\n For a certain period, no one can predict the market and its movements. But historically stock market inches towards higher level for sure. Let\u2019s make it clear with an example. The benchmark index Nifty traded at Rs. 1000\/- in 1996, but in 2018 the Nifty is trading at Rs. 11,000\/-. In this period there have been many ups and downs in the stock market. But in the long term, you will surely be a winner.<\/span><\/p>\n One of the major benefits, when you invest over a long-term horizon, is compounding interest. Let\u2019s make it clear with the following example. Just look at the following graph.<\/span><\/p>\n <\/a><\/p>\n If you make a lump sum investment of Rs. 1 lakh at once and allow the money to compound at the rate of 15%, then you will get-<\/span><\/p>\n Usually, midcap stocks and small-cap stocks are capable of giving you better returns than the large-cap stocks. But they are more volatile than the large-cap stocks. But if you invest your money in the short term just to say 5 years or less, you should go with the large-cap stocks. It is because they are less volatile than the mid-cap or small-cap stocks. Even if you are investing in mid-cap companies after checking out their fundamentals, balance sheet, profit, and loss account, you may not get the desired return.<\/span><\/p>\n Castles are not built within one day, it takes time.<\/span><\/p><\/blockquote>\n Usually, for the short term, the stocks are quite volatile. But in the long run, the market is left with only one option which is to grow. So, you need to do the following things in order to get better returns,<\/span><\/p>\n Let\u2019s make it clear with an example. Back in January 2014 Titan company had a stock price of Rs. 230 and in January 2020 the price of the above said stock is Rs. 1000\/-. So, from this data, we can conclude that Titan Company has delivered 29% CAGR during the past 6 years. The average inflation rate during the past 6 years is 6.92%. The return delivered by the Titan Company during the past 6 years is 4 times the current inflation rate. So, you need to invest in these types of companies or stocks which can not only beat the inflation rate but also generate a satisfactory return in the long run.<\/span><\/p>\n To solve the riddle you need to consider the following points.<\/span><\/p>\n The basic investment strategy is that while you invest in the stock market you need to invest in those stocks or sectors whose business model is clear to you i.e., how the company earns money, whether it will exist after 20-30 years, the risk factors associated with the company, etc. The next thing is to consider the market capitalization of different sectors such as Banking, Information Technology, Finance, Pharmaceuticals and health, Auto, Petroleum, Power, and Engineering, etc. At the time of choosing sectors, all you need to do is to focus the mother sectors like the above-said sectors which will be there even after 100 years. Then you must analyze the factors like the business model, the financial health of the sector i.e., the debt burden on the sectors, future opportunities.<\/span><\/p>\n If you are confused about how to diversify your portfolio, you may read the article\u00a0<\/span>How to Diversify Stock Portfolio.<\/a><\/span><\/p><\/blockquote>\n After choosing the sectors where you invest<\/a><\/span>, you need to pick the best stocks for consistent returns. In order to pick the best stock, you should check out the following parameters of a company before investing in it.<\/span><\/p>\n Parameter #1. Revenue \u2013<\/span> Revenue or net sales of a company should be constant for at least 5 years. You may check that the company has been generating sales growth annually during the last 5 financial years of at least 10%.<\/span><\/p>\n Parameter #2. Net Profit \u2013<\/span> The net profit of a company increases at least 15% on a year-on-year basis.<\/span><\/p>\n Let\u2019s assume, a company has a net income of $ 10,000 per year. It Pays $5,000 in a preferred dividend to investors. It has 50 shares outstanding.<\/span><\/p>\n <\/a><\/p>\n It is a good idea to invest your money in those stocks that regularly pay a dividend and deliver a Healthy dividend payout. The stocks which have delivered healthy dividend-paying must have following features<\/span><\/p>\n P\/E ratio should be low as compared to the other peer companies active in the same industry.<\/span><\/p>\n Let\u2019s assume, a company has a net income of $10000 per year. It Pays $5000 in preferred dividend to investors. It has 50 shares outstanding.<\/span><\/p>\n <\/a><\/p>\n Now, if the stock currently trades at $1000, then<\/span><\/p>\n <\/a><\/p>\n You need to choose such stocks that have P\/E less than 9. But P\/E varies from sector to sector. Lower P\/E ratio of sectors does not mean that this sector is undervalued and is going to boom and deliver a multi-bagger return in the near future compared to that sector which has a higher P\/E ratio. These sectors have higher valuation just because the market is bullish on these sectors and their future potential like Automobile, FMCG, Petroleum, etc. They are the core sectors of the Indian economy and have the potential to deliver a robust performance in the upcoming years.<\/span><\/p>\n P\/B should be low as compared to peer companies operating in the same industry.<\/span><\/p>\n <\/a><\/p>\n Let\u2019s assume, the stock currently trades at $ 100 and the book value per share is $ 10 then,<\/span><\/p>\n P\/B Ratio =\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 [$100\/$ 10] = 10.<\/span><\/p>\n You need to pick such stocks that have a P\/B ratio of less than one.<\/span><\/p>\n The ratio is the snapshot of the asset and liabilities of any company. You will find the assets and liabilities a company has in its balance sheet. Find such quality stocks that have a current ratio of more than 1.5.<\/span><\/p>\n <\/a><\/p>\n Let\u2019s assume, the current assets of any company is $ 1200 and current liabilities is $ 400 then,<\/span><\/p>\nWhy short term and long term matters<\/strong><\/span><\/h2>\n
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Why risk appetite matters<\/strong><\/span><\/h2>\n
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Which stocks are good for common men<\/strong><\/span><\/h2>\n
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What are the good stocks?<\/strong><\/span><\/h2>\n
How to ensure stock prices will go upward in the long run<\/strong><\/span><\/h2>\n
Point #1. Maintain a diversified Portfolio<\/strong><\/span><\/h3>\n
How to Pick Best Stocks for Consistent Returns<\/span><\/strong><\/span><\/h2>\n
Parameter #3. Healthy dividend payout and stable Earnings-per-share<\/span><\/h3>\n
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Parameter #4. Price to Earnings Ratio (P\/E)<\/span><\/span><\/h3>\n
Parameter #5. Price to Book Ratio (P\/B)<\/span><\/span><\/h3>\n
Parameter #6. Current Ratio<\/span><\/h3>\n