Share market for beginners

Tips to Identify Best compnies to invest.

2011-02-05T21:59:00.000-08:00

Loosing money is not a good idea whether you are beginner or seasoned investor.
New start up companies has tremendous growth potential but they have risk too. Only 3 out of 10 Start up survives the time and 1 out 1000 becomes Infosys , HCL or Wipro.

Such companies gives awesome returns with time , if you invest in wrong company you may loose all your money.

Lets discuss the parameters which indicates that company is strong and doing good business today and maintain the performance in future.

Gerenal wisdom is cheap stuff may do for short term but in long term only quality will survive.
If you want a shoe with great quality and good comfort, which survive for 5-7 years buy woodland .
Otherwise you can a pair from unknown brand for 300 bucks also. 300 Bucks shoe may wear out in 3 days or may be in 3 years no guarantee. But a pair of woodland shoe for 3000 bucks will certainly give you full return on investment.

With experience you can find out shoes in local store for 500 bucks which may last longer than Woodland and give better comfort shoes but if you are inexperienced and can't afford buying a new pair in every 3 months then Buying a Woodland is better.

So lets identify the Woodlands of share markets . We have additional advantage in share market that in recession times you can buy Woodland Shoes in half of their actual price . Recession time is sale period in share market . Some great companies you can buy on 50% , 30% discount.

Market capitalization : High market cap of a company indicates good value of company , presence in business over a longer period , faith of other share holders in company and large sales.

Revenues /Sales : Sales is very important factor . Higher the sales higher the profit . Seasoned investor also consider the potential sales in coming year.

Net Profit After Tax : This factor decides the EPS . Companies with High EPS attract many investors , which ensures investor will be ready to pay more price for the company . If EPS is consistently increasing quarter by quarter and year on year over a long period of time then company is a great buy.

There is a catch, sometime company sales their business , assets , lands which contribute in higher net income for a particular year or a particular quarter. It boost the EPS and reduce the PE of company which wrongly indicates that company's share is cheap. When you see sudden hike in EPS check the "Other Income / Income from Other source" of the company.

Debt of Company : Generally it is impossible to do business without loans , don't always look for companies who has no debts. Some sectors don't require high investment for expansions but many sectors need loads of money to expand the business and improve the sales . Setting up new refineries , telecom networks building new infrastructure project essentially need loan .
How much loan is acceptable on companies balance sheet , is decided by the business of company and revenue from sales and how much cash company is having in hand.

A company having 5000 rupees cash in hand with per month net profit of 200 rupees can easily justify the loan of 5000 rupees to expand the business. This borrowed money will help to expand business and improve net profit of company to 300 rupees per month .
Bharti airtel took loan of $10 billion (45000 crore rupees) to buy Zain of Africa.Which will improve the sales of company in coming years and increase the share values.

Cash reserve : Apple is the company who is behind iPhone , iPad , itune , MAC PC and MAC books has cash in hand of more than $40 Billion cash reserve . In Indian currency in equivalent to 180000 crore rupees.
Bharti Airtel is having cash reserve of 35000 Crore rupees in march 2010 . Higher cash in reserve boost the company's ability to expand the business. They can take loans easily whenever they need.

Market shares : Market share in business is important thing , it is good as well as bad. If there are 10 customer in country for a specific product and Company A is having 8 customers , then there is little scope of sales growth in future however it also indicates the monopoly of A in business . Whenever a new customer comes to market chances are it will directly go to Company A because he knows that A is already have 8 satisfied customer.

Competitors : Nokia was enjoying 60% market share in mobiles in pre iPhone era. After launching of iPhone and Android phones . Nokia's market share is shrinking every day but it is still at 31%. Why because Nokia couldn't launch a products like Android Phones and iPhone .

When you buy Reliance Banking Mutual fund or Kotak PSU Bank ETF , you are not only investing money in market leaders but also in their competitors.

Don't invest in a company which have awesome competitors , unless until it has unique unmatched product line. Better to invest in the best competitor.

Average Trading Volume of share : This is important when you suddenly need money , if trading is less in your Company's share then it would be difficult for you to sell them and get money. Higher volume give you liquidity.

SBI FDs vs SBI Share vs Banking ETFs / MFs

2011-02-05T20:03:00.000-08:00

This post is specially for those , who call share market a Game of gambling .
First a bitter fact for fixed deposit lovers.
If you bank (SBI) goes bankrupt then RBI is liable to pay at max 100000 to you irrespective the amount you have in your bank account or in FDs.

Thanks to RBI and various strict monetary policy in India , It is bit difficult for banks to fail and go bankrupt in India. So Fixed deposit with SBI are safest bet no doubt . However in my previous post Safety Vs Return , we saw that over the period of time purchasing power of the money goes down ,if inflation is high, or remain same or just little higher , if inflation is low.

Another interesting think with banks that in good or bad times they retain their values , the products they offer are most desirable and like commodity. We need banks products in any case and pay them fees for their services.

They can increase or decrease the interest rates on FDs and Loans as per the current economical scenario in country.

In this way they have predictable business and revenue stream , if economic is blooming their EPS will rise .
If economic is going down their EPS fluctuate very less and thus retain their value of shares.

Whereas in other sectors like IT , Auto EPS of companies comes down drastically and thus value of their shares because very low business truns in low revenues and may be in loss some time .

Think @ TCS having 100000 engineering not at all working on any software in recession time . Company has to pay their salaries , maintain the various infrastructure . No business .

Bank reaps profit from growth in any and all sectors . Because for all operations and expansions companies need money which comes from banks. If employees are getting better salaries and stable job they save more with bank or take more loans and in turn adding value in EPS for bank.

Banking is all season business and mostly it is very profitable .

In next 20 years , Indian will see growth in rural economics and mobile banking boom which will add tremendous growth in banks revenue.

Are you tempting for opening your own bank and start banking business ??? Very tedious and complex business . Why not you participate in the business by buying shares of SBI or other PSU banks . The safest business of money.

When you buy shares / MFs /ETF of a sector you just invest money in business and outsource every operational function to those companies .

You can't start business with 20000 rupees or 1000 rupees per month. But buying MF /Shares of a company at right value provides same or better opportunity for which you need initial investment of lacs and crores.

Read my next post to identify best companies.

Chapter 9 - High Risk , Low Risk and Medium Risk

2011-02-05T07:39:00.000-08:00

What is your risk bearing capicity ?

Answer to this question decide whether you should invest in MF and share markets or not.

The amount which you can afford to loose . If you are a student with 5000 pocket money per month then you can afford 2000 - 3000 per year to loose . This amount you can invest in a good mutual fund.

Had you invested 3300 in 2002 in Reliance Growth- G (NAV 16 Rupees ) you would have had 90000 rupees today.
or

Had you invested 3300 in Satyum shares (10 Rupees) after scam in Jan 2009 , you would have had 10000 rupees today . FDs take 10 years to give this much returns.

This is all about high risk profile - high return scenario.

Now suppose you have 1000000 rupees and you are 58 years old. The amount you saved in FDs for your daughter's marriage. Can you afford to loose it little bit not at all. Whatever return you get from FD is enough for you . this is known as Low Risk profile - Low Return.

You are 30 years old father who's kid is going to join school after 2 years . you set aside 50000 rupees for his school donation . you can invest this amount in SBI / CANARA bank share (This type of funds invest 10-20 in equity rest in FDs ,Bonds). He will get some moderate return in 1-2 years and when ever he get significat return he will sell all shares immediately .
This is how you can describe Medium risk profile - Medium return.

Your profile decide how much you can invest in different investment instrument.

Tip : Never invest with borrowed money, Never!!!
Copyright © 2011 sharemarket-for-beginners.blogspot.com

Chapter 8 - What is Short term , Long Term and Medium Term ?

2011-02-05T07:08:00.000-08:00

Investment Guru of MFs give following duration for short , medium and long terms.
Short Term : 1-2 Years
Medium Term 3-4 Years
Long term : 5 years and more

But in my experience there is nothing like short term in mutual funds. If you need money within 1-2 years then better go for FDs , Gold or Silver or bonds.

If market tank for some reason then it takes at least 1 to 2 years to come back to previous level and it is not guaranteed that your Mutual fund NAV will be back to previous NAV in 2 Years despite giving 100% return in this period.

After 2007 - 2010 recession period many mutual funds are still below there previous hight.

Medium term 3-4 years time duration is enough to keep your money protected and give some return if some kind of recession hits the markets.

Best time horizon is PPF's or Tax saving FDs time period that is 5 years .
Unless until you invested in Junk Mutual fund , you should not worry for returns for 5 years duration
With best Mutual funds you can expect good returns in 5 years horizon .
Point to be noted here is that redeem your money if markets hit life time high before 5 years . Otherwise greed of more return with eat out your profit when you need money .

best time period is 10 years > for wealth creation , house , car buying ,children education marriage etc .
Happy investing ..

Copyright © 2011 sharemarket-for-beginners.blogspot.com

Chapter 7- What NAV will be applicable on my order?

2011-02-05T06:46:00.000-08:00

This is the next part of my previous post Chapter 6 - When to invest in Mutual funds .
2 PM is cut-off time specified by SEBI

If you place your order WELL before 2PM on a trading then you will get the closing NAV of that day .
i.e If markets goes down , you will get more units and if market goes up you will get less units.

There is no way to buy Units at previous trading day's NAV.

If you place order on or after 2 PM then NAV of next trading day will be applicable on your order.
Orders placed near 2 PM , like 15 minutes +- are processed on best effort basis. May be your order process on same day closing NAV or May be with next trading Day closing NAV.

There are 3 time slots when mostly market touch their peak / low of the day.
10-11 AM
1-2.30 PM
3.30 PM afterwards (in square off /closing session)

Copyright © 2011 sharemarket-for-beginners.blogspot.com

Chapter 6 - When to invest in Mutual funds

2011-02-05T06:17:00.000-08:00

This is a bit tricky question and most of the investment advisory suggest not to time the market .
But all successful investors reap huge profits only by timing the markets . When nobody else is buying and markets lying at their lowest point that is the best time to invest in markets.

If you see the Rakesh Jhunjhunwala investment history , he bought stocks at cheap rates.

Question is What is cheap rate of a stock ?
SBI @ 2600 Rupees is cheap or Colagate and Pamolive @ 816 is cheap ???

Earning on 1 share of SBI is 155 Rupees where as for Colagate it is 29 Rupees.
SBI 's 1 share is earning more than 5 shares of Colagate.

so SBI is cheap than Colagate.
SBI Price to Earning Ratio (P/E or PE ) is 15
Colagte Price to Earning Ration is 27.

Most Important thing to note in share market is Growth potential of company for next 5-8 years and present Earnings per share and PE.

So When Sensex is going down and Earnings of companies are intact then it means shares are cheap.
Best time to invest in mutual fund is Recessions when markets are going towards rock bottom.

If you are buying at low rate then obviously you will reap more profit quickly when markets will start climbing again .

But we are not God and we can say which is the lowest point in share market ?

so one simple alternative is to do Blind SIP investment .

Blind SIP : Whenever you awake and find that u have monthly surplus of 1000 rupees you start monthly SIP for 3 years. and you forget that . Doesn't matter market are at peak , or at bottom .

Another better option is Active SIP Investment.
Active SIP investment :
a) Starting SIP when markets at near life time high (SENSEX PE @ 20 -- >25): Wait for few months correction can come any time.
Start SIP with half of the monthly surplus amount. Like if you have monthly surplus of 5000 invest monthly 2500 . Save rest of the amount for coming opportunity. Accumulate and invest in one go when Market PE come down to 13-17 .

b) Starting SIP markets are at their lowest point in last 2 -1 years : (Market PE should be around 13-16)
Start with lump sum investment when markets start rising from their low. And start SIP for next 2 Years .

c) Start SIP any time , Skip SIP for the months when Markets hits their hights , Invest saved amount when Markets come down at 10 -15% or more . Restart SIP when you thing time is coming .

Remember that you have to invest only in best Mutual fund so that when time comes you can more unit of that fund and (Average ) reduce the price of fund units .

Copyright © 2011 sharemarket-for-beginners.blogspot.com

Chapter 5 - How to find best Mutual fund in India!!

2011-02-05T05:31:00.000-08:00

You don't have to be very intelligent and geek to find out best mutual fund in Indian Mutual fund industry.
I can tell you here in one line.
But then whats the fun in investing , no research , no finding of Gem among .

I am going to tell you the mutual which is giving best returns from last 10 years and will be remain best for next 100 years .

Now guess friends ..

ummmm is it HDFC Equity (G ) ??? no it is one of the finest we have but not the best. Here G means Growth option. I   will NEVER ... NEVER recommend a Dividend option Mutual fund in my posts.

ok another Guess is it IDFC Premier Equity A (G) .. Noops It is another very good fund but not the best.

Reliance growth (G) not at all .. ok leave it for now and lets discuss what are the attribute of a good mutual fund.

1. Consistent good returns year after year. (Not quarterly monthly best return)

2. Fund size should be at least INR 2000 Million (200 Crores) + but not more than 5000 crores.

    Why not more than 5000 crore +?
You can easily keep safe amount of 5000-10000 while traveling but if you have 2 Crores in cash then ???
Bigger the amount is always more difficult to manage . Same applicable to Mutual fund size . It need best discipline and practice to growth the larger amounts. Best example is Reliance Growth Mutual fund (7000 Crore ) now it has started shaking with loads of money. Its return are still good compare to other but now difficult to match with previous returns .

on the contrary HDFC Equity (G ) is similar in size and still it is able to maintain the returns of previous history.

3. At least 3 Years old with good returns.
4. Do not touch New Fund Offers , do you remember SBI one India and SBI Blue chip NFOs.
5. How many Units of mutual fund you get doesn't matter.
6. Don't get tempt to buy MFs with lower NAV.

7. Repeat above three points with me times.
    Why ?
    Say we have 20000 Rupees to invest .

There is MF A which is giving 10% yearly returns (NAV of A is 10 Rupees)

Three is another MF B which is giving 20% yearly returns (NAV of B is 1000 Rupees)

Lets invest 10000 in both mutual funds

Units allocation for A : 10000/10 = 1000 Units :) wow so many units!!

Unit allocation for B : 10000 /1000 = 10 Units :( so less . oops

After 5 years (Assuming both funds gives their previous returns)

Current NAV value of A : 16 Rupees

Current NAV value of f B : 2488 Rupees

Value of investment for A : 16 *1000 = 16000 Rupess

Value of investment for B : 2488*10 = 24880 Rupees

You can see that fund with better returns is important , NAV value is not important.

so let me disclose the best mutual fund we have , it is Reliance Banking Mutual fund (G)

Why is it best mutual fund ??? find it out yourself using various websites who provide details of mutual funds.

Hint : Compare its returns for 2001 -2011 with other best mutual funds.
Compare its recent performance (last three years) with other best mutual funds.

Copyright © 2011 sharemarket-for-beginners.blogspot.com

Chapter 4 - First step in share market "Mutual funds"

2011-02-05T03:35:00.000-08:00

How does mutual fund works :

In simple term Mutual fund house collects money from thousands investors and Mutual fund manager invest that money in share market after through research. Mostly Mutual fund managers have proper education , training and experience in finding good Companies. They are also responsible to continuous evaluate the investment they made.

Thus there are numerous advantage of investing in share market through Mutual funds.

1. You have not to read the profit /loss accounts of the companies to find a good company to invest in. Mutual fund manager will do it for you.

2. Once you invested in a share , you have to keep track of performance of companies . Some companies are susceptible to global and local policy changes and raw material rate changes . Keeping track of such news is difficult for common /new investor . Mutual fund manager does this job for you for a very small amount (if you are investing in MF through a Broker) or free of cost if you are investing in Mutual fund DIRECTLY.

3. Deciding when to buy a particular stock and when to sell a stock for profit making or to prevent further loss is most difficult task , with Mutual Fund you delegate it to fund manager for free of cost or at very small price.

How can you invest DIRECTLY in Mutual funds?
a) You can directly go to mutual fund office in your city and apply for mutual fund . In application form instead of Broker code write "DIRECT" and give them check . You DO NOT Need Demat account for mutual fund investment. You must have PAN Card and Address proof.

b) If you want to invest online then go to web site of the Mutual fund.
1. Find "invest online " or "investment online" option.
2. Fill Application online (BROKER CODE - DIRECT )
3. Submit the application and make payment by Netbanking or credit card.
4. When investing 1st time you have to submit /post PAN card copy / address proof to Mutual fund office. then they will give you online login ID / Password . First time onwards you need not to post / submit anything ,you can buy online. (This procedure is checked for HDFC mutual fund and Reliance Mutual fund other Mutual fund house must be giving something similar options check their websites .)

NOTE : When you are applying DIRECT you need not to pay any fee to anybody. Your FULL amount will be invested in the Mutual fund you select.

If you sell your mutual fund before 1 year you have to pay EXIT LOAD (1% - 2%)

C) You can open account with one of the following broking house but they will be charges some fee for every mutual fund investment you make through them.

Now a Days Most of the banks are having online trading product. Either they have their own broking company like ICICI has ICICISecurities (ICICIDirect.com) or they have tie up with some broking firm.

No one Tell you tip : Don't open investment account if you want to invest only in Mutual fund.

If you want to try your hands on share investment and share trading (yes these are 2 different terms) open trading account through your saving bank account provider bank. Your should be having tie - up with some broking house.

Before opening account CHECK what is the fees you have to pay for every fund transfer (SIP / lumpsum buy) .

Why ? because if you have saving account with SBI and you are opening online MF buying account with Reliance MF . SBI will charge some money for every purchase you make with Reliance .

When Bank and Broking fund /Mutual fund house has tie - up , Bank charge less or no fees for fund transfer to Mutual fund house .

I have ICICI bank account and trading account with ICICIDirect.com . Charges are little higher but I think I get better services. You can check with your bank if it has tie-up with any Broking firm or they have their own broking firm.

Check next post to find which Mutual fund is best for investment.
Click here to learn about different type of mutual funds

Chapter 3- Investment options : safety vs returns

2011-02-05T02:58:00.000-08:00

In India common man believes in safe and risk free investments like , gold ,silver ,FDs , Personal Provided fund , Employee Provided fund EPF and property.
For him equity and share markets are some like gambling.

Lets consider all investment options in current scenario .
10 years back with 10 Rupees you could buy 1-2 Kg onions , Today you will get 250 grams to 400 grams onions. Reduction in purchasing power of money is known as inflation (मंहगाई) .

Following is the illustration for Jan 2000 - Jan 2011 . We showed returns from various instruments for last ten years.

So you can clearly see that which investment instrument is best for you to get proper return and fight with inflation .
If we consider income tax also then FD gives negative returns (depends on your tax bracket).
Other options give you real returns even after deducting tax.

You can't invest 1000 Rs in property so I didn't consider that option in this scenario.
Property return may vary drastically from location to location and its usage. A average location property gives almost same return as Equity in the same time frame. Prime location property will fetch best result but it is difficult to buy as you needs loads to money to buy property in one shot.

So now think about requirements in future and how much money you want in future to meet them.
This will help you to decide proper instruments of invest .

Child education after 10 years , Marriage , buying car after 5-6 years , Buying house after 10 years , retirement fund etc , where time frame is something more than 4 years , are good for equity , MF and Gold investment.

In my next few post we will discuss How to select good Mutual fund as first step towards equity investment.
or read my exclusive post on best mutual fund of Indian mutual fund Industry ..
No one tell you about this fund.
Learn Investment discipline here .

Chapter 2 - Invest early to make sure you can enjoy party every week.

2011-02-04T23:18:00.000-08:00

More you save invest today more you have to spend tomorrow.
See the illustration to understand this bizarre fact.

You can see that Mr Saver started saving immediately as soon as he started earning and invested 50000 per year until the age of 25 years.

Another hand Mr Party Goer started earning same time but started investment and saving for future at the age of 25 years. He saved same amount 50000 per year for total 36 years. Mr party goer invested more in longer period but he has less amount to spend at age of 30 , 40 ,50 and 60 than the amount Mr Saver has.

As you can see in the above table even if Mr Party Goer invest more amount per year (75000) than also he will be having less amount to spend at 30 ,40 ,50 and 60 .

More wise tips in another posts . Keep reading.

Chapter 1 - New to Share Market , Don't invest in shares !

2011-02-04T22:19:00.000-08:00

Yes , you read right. Don't invest in share market if you are new. Invest in Mutual funds!!
Thanks to Mutual Funds Industry !! Your money will be managed in shares by expert team who have full knowledge of share market and who keeps buying selling shares in BSE and NSE on your behalf.

These expert have best knowledge and best salary and incentives for their work.
Word of Caution : Not every mutual fund will make you rich . You must find best among thousands to multiply your money.
But there are mutual funds who are giving excellent returns since their inception (10-15 years )
One of my favorite mutual fund is Reliance Banking MF (Growth option)

Tip: Never invest in Dividend option Mutual fund always opt for growth option.
To understand the problems of Dividend option read this post.

Which Mutual fund is best to invest click her to know more ...

How to make first investment in sharemarket?

2011-02-04T21:45:00.000-08:00

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