How to Choose Stocks as a First-Time Buyer

Stock investment is one of the best ways to build wealth in the long run. But when a new buyer is investing in the Indian stock market for the first time, it becomes quite confusing to identify the right stocks among so many stocks available and the fluctuating market. By following the above guidelines and putting in some effort you can make good decisions to get you on the investment ladder. The following is a guide that will assist you in choosing your stocks as a novice investor.

What Are Your Objectives and Tolerance to Risk

However, stock selection cannot be done without understanding your financial goals and objectives. Ask yourself:

Is the money you are spending to make money now or are you saving for the future?

What kind of risk are you comfortable with accepting?

For example, if you are planning to save for your retirement, you may wish to invest in blue chip stocks which are less volatile. On the other hand if you are willing to take slightly higher risk for slightly higher gains you may look at mid-cap or small-cap stocks.

Make Sure you Understand All You Need to Know About the Stock Market

Every newcomer should have a basic idea about how stock markets work and what they are all about. Familiarize yourself with terms like:

Market Capitalization: The aggregate value of a company’s stock in the market.

Price-to-Earnings (P/E) Ratio: Shows the current value of a stock in relation to the fundamental value of the security.

Dividend Yield: Illustrates the dividend pay-out ratio as a measure of the return on investment.

In India, the source like National Stock Exchange (NSE) and Bombay Stock Exchange (BSE) website contain useful information regarding the listed companies and their performance.

Start with Blue-Chip Stocks

Newcomers are advised to invest in blue-chip stocks. These are stocks of companies with stable earnings records and with relatively long years of performance. Some of the blue-chip stocks in India are Reliance Industries, Tata consultancy services and HDFC Bank.

Although blue chips stocks are not necessarily high performers, they are stable and perfect for new comers into the market who are not so keen on high risks.

Understand the Company’s Basics

Doing a fundamental analysis assist you in analyzing the strength or otherwise of a particular company financially and prospectively. Focus on the following key aspects:

1. Revenue and Profit Trends

Analyse the company’s revenue and profit in the last five years. The steady growth shows that the business is steady.

2. Debt Levels

Corporate with high rate of debt can be problematic during the time of evaluation. Look at debt to equity ratio; the lower the better.

3. Management Quality

It also points to the fact that an organization headed by experienced and ethical people is most likely to thrive. Investigate its past performance by its management.

4. Industry Performance

Learn as much as possible about the industry in which the company is situated. For example, the sectors of Information technology and pharmaceuticals have been growing at a faster pace in India in the current decades.

Diversify Your Investments

Well known saying that “Don’t put all your eggs in one basket” is very well applicable to investment. You reduce the risk because you invest in various sectors and classes of securities instead of concentrating in one sector. For instance:

Invest in many sectors including information technology, fast moving consumer goods and banking.

Invest in stocks and at the same time one should hold other investment opportunities like mutual funds or bonds.

In this way, you can offset one’s losses with the other’s gains and so on, making the risk less of a problem.

Review Historical Stock Performance

As much as past performance is no predictor of future results, the past can be a good indicator. Look for stocks with:

The prices have been steadily increasing in the long run.

Lower volatility in comparison with other firms operating in the same industry.

Historical stock data can be found on Moneycontrol, Zerodha, or ET Markets just to name a few.

You should think about investing in Index Funds or ETFs.

If you start thinking that selection of individual stocks is a problem, you can go for index funds or Exchange Traded Funds (ETFs). These mutual fund schemes mimic the indices such as Nifty 50 or Sensex. Benefits include:

Low cost of entry.

A situation where one invests in a number of stocks.

Less risky as compared to individual equities.

Follow News and Markets

Read market news, economic policies and events and company-specific events. For instance:

There is a possibility that changes in RBI interest rates will affect banking stocks.

New government policies may be in place to support new sectors for instance the renewable energy sector.

The Indian markets can be followed through Economic Times, Mint and Business Standard for updates on the same.

Steer Clear from Common Mistakes Made by Newcomers

1. Chasing High Returns

High-return stocks may be sexy but could be very risky. This is where one should focus on long term stability rather than growth.

2. Overtrading

Such buying and selling habits result in high brokerage charges and possible loss making. Just wait and trust your plan.

3. Ignoring Research

Speculating is always a bad idea because it often leads to bad decisions relying on tips or rumors. It is always important to do your homework before investing in a stock.

Always Begin with Little Amounts and Increase Them Slowly

In any investment, it is always safer to start small especially for a first time investor. This approach reduces risk making it possible for you to gain experience in the stock market while at the same time making profits. As you go on, you can start investing more as you get confident and knowledgeable in the process.

Technology for Investing

Many applications and websites in India that are easy to use, include Zerodha, Groww, and Upstox, among others that make investing easy. They provide features for stock trading and analysis, portfolio monitoring, and articles with basic information about the stock market.

Conclusion

Selecting the right shares for the first time investment in India involves the process of research, time and planning. First, make sure you know your financial objectives, the basics, and the fundamentals of a company. To reduce risk, diversify your investments, and you can try blue-chip stocks or index funds for gradual increase in value. If you begin with the small investment and make yourself aware of the market, you can begin a successful investment in the stock market of India.