Investing in the stock market boils down to two things –
- Getting a demat cum trading account
- Selecting a stock that you can invest
The first part is easy and requires 20% effort. You can do it online sitting comfortably from your home. You just need your KYC documents, laptop/ PC, and an internet connection.
The second part is where 80% of the effort is needed if you want to do your own research and analysis.
If you can spend some time on the weekends or after office hours to research about a company and the financials then it’s best to do your own research.
If you have time constraints then you can pick a full-service stockbroker who can provide you with the research reports on stocks that you can invest in. But the charges of the full-service stockbroker will be 10 times higher.
Picking a stock is not that tough. If you spare some time and put in a little effort then you can learn stock selection in a day.
Before that, you need to check – “How you want to invest in the stock market?”.
There are two categories of investing –
#1. People who want small but daily profit
Intraday trading method of investment suits in such conditions.
You daily use your capital to buy and sell stocks with the expectation of earning profits. The investment holding period is for a shorter time period ranging from a few minutes to the maximum for a day.
You rely on charts more than the fundamentals of the company because the underlying idea is to use the price movements made a trade.
Here you can make money in both the rising and falling markets.
In the rising markets, when the prices are increasing you first buy at a lower price and sell later at a higher price to earn profit.
In a falling market, when the price of a share is decreasing then you first sell at a higher price and later buy at a lower price.
Click here to know more about – “How to Start Intraday Trading”. (INSERT LINK TO OUR OTHER ARTICLE)
#2. People who are looking for huge growth over a longer time period
Value Investing suits such a scenario.
Huge growth happens when the stock price doubles, triples, or even go on to become 100x (called multi-baggers) over a period of 10 year time period or more.
This happens when the underlying business of the company grows over the years creating an enormous amount of value for the shareholders.
Obviously, all companies won’t grow that big. You have to spend time understanding the company’s business operations, the fundamentals, and the management.
If your investment idea matches with value investing then proceed to read further. The article will help you do both the – opening a demat & trading account and selecting a stock for long term investment.
First, let’s tackle the 80% part – of making a stock selection. In the later section, you can find the steps to open a demat cum trading account and invest.
Step 1 – Select Stock for Value Investment
#1. Use Free Stock Screener Tool to Filter Quality Businesses
Use any free stock screener tool like –
- Equity Master Stock screener
- Trading View Stock Screener
- Investing.com Stock Screener
Set the screening parameters as below –
- Market Capitalization >= Rs. 500 Cr
- Sales growth (over 5 years) >= 10%
- Profit growth (over 5 years) >= 10%,
- Debt to Equity ratio (Average over last 5 years) <= 1
- Return on Equity (ROE) >= 15%
What you get is a list of high-quality businesses with signs of strong fundamentals and growth.
For example, when you put the parameter in the Equity Master screener tool, you will get the list of shares as shown below –
#2. Pick Companies Whose Businesses are Simple to Understand
Next, you need to select the company whose business operations you understand. That’s because investing long-term is like marrying into a company.
If it is hard to understand what business the company is doing, what are their products, who are its suppliers & buyers, how it is making sales then you won’t be able to judge how the business operations are running.
The easiest would be picking companies in the industry in which you are presently working. That’s because you are familiar with the industry, you know who are the bigger players and stable companies and overall how the business operations are carried out.
You need to devote some time to read the company and the industry in case you don’t find any companies that you understand in the list.
#3. Find Companies With Competitive Advantages
Competitive advantages are factors that make a company’s product or services more desirable to the customer when compared to another company operating in the same industry.
Few examples of competitive advantages are –
- Technology – think of iPhones
- Better Experience – Starbucks
- Economies of scale – Amazon
- Brand Value – Colgate
- Trade Secrets – Coca-cola
- Ease of Use – ICICI Net Banking
- Monopoly – Indian Railways
Competitive advantage generates higher value for a company because of certain strengths or conditions.
Having a competitive advantage allows companies to generate more sales, have better margins, have quality products, and repeat customers.
For example – Jio has the following competitive advantages as compared to other telecom companies in the wireless internet space where it offers –
- 4G high internet speed (unlimited data) at low tariff rates
- No charges for voice calling
- Unlimited voice calling, free SMS and national roaming
- Better signal strength
- Prime facilities like Music, Cinema, TV, News, and Money with JIO Apps
Other companies like MRF, Indian Railways, Maruti, Asian Paints have strong brand value creating advantages.
#4. Look for Companies With Able & Trustworthy Management
Pick companies having ethical top management and executives. Mismanagements, frauds, and personal interests push executives to take bogus deals, dupe customers and cheat shareholders.
There have been several cases of fraud like – Nirav Modi & Mehul Choksi of Gitanjali committing fraud with PNB Bank. Vijay Mallya destroying the Kingfisher brand.
Rana Kapoor (Yes Bank) and Chandra Kochhar (ICICI Bank) diverting funds and taking undue advantage of their positions.
This destroys value in the long term with people losing money and creates distrust in the investing community.
You can know more about people in the management by checking –
- Company’s Annual Report
- RBI Defaulters list
- CIBIL website for the suit filed cases
- MCA Defaulters Directory
- Social Media News
#5. Use Intrinsic Value Calculator to Get Purchase Price
Finally, you have selected the company that meets the above criteria.
In the last step, you should know whether the current market price at which it is trading on NSE/ BSE is more or less than the value of the company. That’s because you would like to pay for the actual value, neither less nor more.
You can use the Benjamin Graham formula for arriving at the intrinsic value of the share.
Intrinsic Value = EPS x ( 8.5 + 2g) x 4.4 / Y
Where EPS – is the company’s last 12-month earnings per share value
8.5 is the constant proposed by Graham in the formula
g – is the long-term (five years) earnings growth estimate of the company
Y- is the current yield on an AAA-rated corporate bond
For example, if suppose for a company the –
EPS = Rs. 55
g = 10%
Y = 5.5%
Then the intrinsic value of stock = 55 x (8.5 +2 x 10) x 4.4 / 5.5 = Rs. 1254.
Now if the current stock price is Rs. 1500 then the stock is overpriced by Rs. 1500 – 1254 = Rs. 246. You need to wait for the stock price to drop at the level of Rs. 1250.
Of it the current stock price is Rs. 1100, then the stock is underpriced by Rs. 1254 – 1105 = Rs. 149. You can buy as soon as possible because you are getting security at a discount than the actual value.
Follow the below steps to get a demat cum trading account to actually buy the shares if you do not have one.
Otherwise, you can skip the below portion and directly start investing.
Step 2- Open a Demat & Trading Account
Below are the steps to open a demat & trading account with India’s largest stockbroker – Zerodha.
If you do your own research like above then Zerodha is best because it charges Rs. 0 for all the delivery trades irrespective of the volume of the trade.
But the process will be more or less the same if you wish to open an account with any other stockbroker like Upstox.
#1. Signup to Start the Application Process
Provide your mobile number & email ID to signup and start the online application process at Zerodha.
Confirm your identity with the OTP sent by Zerodha on your mobile phone. Fill in the PAN details and date of birth.
#2. Select Equity as Trading Segment
To invest long-term in shares you only need to pick the Equity segment. Pick other segments if you are interested.
After which you need to pay the account opening fees of Rs. 200. Zerodha also provides commodity trading on MCX at an additional fee of Rs. 100.
#3. E-sign Account Opening Form & Upload KYC Documents
Next, you need to e-sign the demat cum trading account application. Do this using your Aadhar number.
Use the Aadhar OTP received on mobile to verify and e-sign your application.
Post that you need to upload your KYC documents such as – Aadhar card, PAN card, canceled cheque, or a bank statement.
The account opening process may take up to 24 hours. You will receive an email containing your account ID and password to access your trading account.
Once you have your account ready you need to deposit money to invest in the stock market.
Step 3 – Deposit Money in Your Trading Account
First – Select the “Funds” tab on the top of the screen and click “Add funds”.
Second – Fill up the investment amount and select the payment method.
Provide OTP received on your mobile to confirm the fund transfer. And the money will reflect in your account shortly.
Step 4 – Buy Your Selected Share
You will get a blank screen as shown below when you open up the trading account.
On the search option type the share in which you want to invest. For example – if you want to invest in Asian Paints stock then you will see as below –
Select the Asian Paints stock. The marked stock of Asian paint is from NSE. The immediate next is Asian Paints shares traded on BSE.
You can select the Asian paint stock from any of the stock exchanges. There is no difference.
Click on the blue buy button.
You will get the Buy order form. Fill in the details as shown below –
- Check exchange – here NSE is selected. You are free to select BSE.
- Select the long term radio button for investment
- Fill in the quantity that you want to buy
- You have the option to buy at the current market price when you choose the “market” option. Or you can select the “limit” option to specify the price at which you want to buy. For example – you can fix the price at Rs. 3010.
Click on the “Buy” tab to place the order. Once the order is executed it will show in your holdings book.
Investing in the stock market is easy and can be completed within a day or two. You can do it sitting at your home without any extra help from the so-called financial advisers.
Yes, you need a bit of effort but will learn a ton of things in the process. Let me know in the comments if you have any questions.