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How to buy stock in this volatile situation is very important to learn. Buying stock is a great way to invest in your future. Whether you are starting a family, creating a retirement savings plan, or simply looking for an investment that will grow with the economy and provide additional income, owning stocks can be a smart option.
Here are some things to consider when buying stock:
- What type of stocks do you want?
- Do you have enough money for this purchase?
- How much risk are you willing to take on?
- Should I buy individual stocks or mutual funds?
Once these questions have been answered it’s time to start shopping! At first glance online there may seem like thousands of different companies available but narrowing down the search by industry sector can make finding what company best suits your needs easier.
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How to buy stock in this Pandemic scenario?
The Covid-19 pandemic has caused a lot of unemployment and disruptions in the economy. A lot of small firms have shut down creating inequality across the country. Yet, a lot of large firms were able to capitalize on this and gain in the stock market. Where some saw losses, others saw an opportunity. So is it possible for an inexperienced investor to gain in the stock market (especially with the pandemic around the corner)? The answer is complicated but it isn’t impossible. Let’s dive in to crack the code of the Stock Market.
What is a Stock market?
The stock market is a marketplace where the exchange of shares takes place. Buying shares allows you to buy ownership. For example, buying 12000 shares of a company that has a total of 1200000 shares, gives you 10% of ownership. The voting power and other fringe benefits increase with the number of shares owned. One of these fringe benefits is dividends.
Dividends are extra monetary benefits given to shareholders almost every quarter of the year. For example, if the share price was 100 units and the dividend is 10 units, one can make more money just with the dividends. With constant dividends in the long run, as well as the dividends being reinvested, the returns from the stock market will be quite high.
How to invest in the stock market?
To invest in the stock market, you need a Robinhood or Crypto or Demat(India) Account and a stock market platform. There are several stock market platforms: ‘Zerodha’, ‘Upstox’, ‘Groww’, etc. These platforms are extremely user-friendly and provide a lot of support services. Robinhood or Crypto requires you to submit your ID generally Driver’s license or a state ID to create an account. The Demat (India) account can be created via these stock market platforms. The required details are PAN card, Aadhar Card, KYC, and some other personal/bank information. Once the Demat account is created, you can add funds into your account via UPI or Net banking. You can select stocks and start investing.
Learn about Intrinsic Value
The most successful method of investing is value investing. Value investing is finding the actual value of the stock and making decisions based on that. For example, if the intrinsic value of a stock is actually 120 units but is being traded at 100 units, you can buy the stock and can expect it to grow in the future. The chances of failing with this strategy are quite low. Warren Buffet is an ardent disciple of this strategy (first introduced by Benjamin Graham), he made approximately 20% per year for 50 years in a row. In his words, ‘Price is what you pay. Value is what you get.’
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Why is intrinsic value important?
So how does one determine the intrinsic value of a share? Well, there is no one certain way to determine the intrinsic value. The stock market is constantly changing and so are the instruments used to measure it. But, there are stock fundamentals that everybody should be knowing in order to evaluate the intrinsic value. These are the P/E ratio, P/B ratio, Dividend yield, Book value, Debt to equity ratio, and Return on equity.
P/E ratio is the Price/earnings ratio. A low P/E ratio means that the stock is quite undervalued by the market and vice versa. When looking at the P/E ratio, it is good to compare them with other stocks in the industry. For example, if the P/E ratio of HCL is lower than the average technology stock, it makes HCL a better buy compared to others.
P/B ratio is the Price/Book ratio. Book value is the value of the stock when it collapses, it is how much it could pay to the shareholders if it shuts down. A high book value would mean that the stock is doing very well on paper. Therefore, a low price/book ratio is often preferred. Dividend yield as mentioned earlier is the extra earning of a stock that the shareholders receive. This happens due to large profits. As an investor, it is important to look at the growth of dividends for a firm and take action accordingly.
The debt to equity ratio is simply how much debt a company has when compared with its income. Covid-19 has increased losses for a lot of firms and a high debt to equity ratio should be avoided during such times. I would suggest picking stocks that have little or no debt as debt gets worse during a pandemic.
Other metrics to consider before investing in stocks
Other than these stock fundamentals, there are a lot of things to be looked at. These include profit margins, shareholder patterns, analyst ratings, and the news. If the promoters of a company are buying more stock, it means that they are extremely positive about the growth of the firm. Therefore, this stock should be chosen.
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The stock market is a game of uncertainty. There is no guarantee that all these metrics will work. To win the game, you will have to diversify and slowly build your portfolio. Initial losses are fine, always give more importance to long-term gains. Experience in the market is vital. That is how you can be a strong competitor.