THE GOLDEN PARAMETER TO MASTER THE ART OF STOCK MARKET

Stock market is considered to be the best investment alternative as per some analysts. Yet out of the total population of around 1.2 billion, only 20-25 million Indians invest in shares or mutual funds which makes for only 2% of the total Population in the country. So certainly, there may be many misconceptions associated with it. Among which the most popular is that there are more chances of failure than success in this form of investment. 

Agreed that the stock market fluctuations are very uncertain but if you have the perfect knowledge to analyse the company’s quantitative and qualitative data  you can be another successful investor like Warren Buffet or many others who’ve made themselves a fortune through this so called 

“gambling”.

“To earn money, a doctor dedicates 5 years in MBBS course ,an engineer dedicates 4 years in BTech course whereas to earn money in stock market nobody is ready to dedicate a single month to learn  the basics. “

The art of mastering Stock market lies in analysing a company’s share based on certain parameters and if it is worth investing, then picking it when the market is at its bearish phase and holding it up until it reaches its peak bringing you a healthy return . 

If you’re restless and expect higher returns within a short period of time , you may end up receiving nothing at the end and on the contrary even losing the amount invested. So “patience” here plays a great role.

Now, what are those parameters you’ve to look for before choosing the favourable share and what all parameters have to be ignored at the beginning but still are presently considered in many cases by many small investors?

First, we’ll be talking about the parameters that have to be ignored at the beginning.

PROFIT AND SALES GROWTH –

Many small investors analyse a company’s profit growth / Sales growth between it’s consecutive financial years. However, they don’t understand that such figures can be easily manipulated by companies. Many large enterprises alter profit numbers by taking more external debts so as to ensure regular investments in their shares.

Even sales growth cannot assure higher returns. You cannot predict through increasing sales, how much cash they’re generating as there may be some credit sales taking place that in some cases, cannot be liquified into cash because of bad debts .

These are the 2 (often) misleading parameters that are being considered even today and form a major reason for bringing negative returns to the shareholders.

Now, what should be the parameter on behalf of which we are going to judge a share? The answer is always Return on Investment / Equity.

RETURN ON INVESTMENT / EQUITY (ROI)-

Return on Investment basically refers to the earnings (interest received) generated from any amount of Investment. Suppose you invested ₹100 on the shares of company A and ₹1000 on shares of company B . Company A generated a profit of ₹30 while B generated a profit of ₹200 . ROI = (Net profit/cost of investment) ×100

Company A

ROI= (30/100) ×100

=30%

Company B

ROI= (200/1000) ×100

=20%

Now we can see 30%>20%

So, comparatively one should be more willing to invest in company A than company B .

Formula to derive ROI = Net Income / Shareholder’s equity .

Thus ROI forms a better parameter to evaluate a share’s potential return than many others. There are many other parameters that we’ll learn later in successive articles.

Conclusively, the misconception that the stock market is a form of ‘Gamble’ exists only because people lack appropriate knowledge and start investing blindly. So awareness about the stock market is a much necessary know-how to master the Game.

Fixed deposit v/s Stock Market : which is a riskier investment ?

Going Old school might be a better alternative in all other aspects but have you ever witnessed someone become rich because of preferring the primitive methods of investment ? The answer probably is a NO.

No matter whichever business is concerned, if you’re no longer willing to adjust with the current business environment your business may fail to survive in the long run. The Same goes with investing. Thus, interacting with the business environment and implementing suitable strategies for survival in the long run is a MUST in today’s era .

So let’s just get straightaway into the topic and gain maximum from this piece of article .

Most of the Indian households consider the primitive ‘FD’ (Fixed Deposit) as a safer investment than many other existing investments because it ensures a fixed return, say 6-7% to the investor. While if we consider the Stock market, the expected returns are very uncertain so the chances of risk increase. While investing in the stock market may require great knowledge and expertise, But then just imagine that 6-7 % a year is sufficient enough? Will it make you retire rich in the coming years? NO, it never can .

On the contrary some analysts believe that Investing in FD is a yet riskier investment than many other investments. How? Just compare it with the inflation and taxation system prevalent in India.

Let’s consider that you invested ₹ 100 in FD and parallelly you saw something you want to buy that will cost you ₹100 at the present time. After a year, due to increasing demand  it is expected to see a 10 % inflation on that product.Now ,will a 7 % return on ₹ 100 i.e ₹ 107 able to finance 10% inflation i.e ₹ 110? NO. 

Now on the other hand, we know that interest income received from FD is fully taxable. So how can you expect to be rich with FD? It can stabilise your earning to some extent ( based on the amount of investment ) but It can never give you the lavish life you dreamt of.

So from the above comparisons it’s quite clear that before analysing any investment decision and finalising which one to choose, many factors should be considered. Inflation and taxation are two such factors.

There are many other investments that can yield such returns which are worth living a life you always dreamt of. It’s quite obvious many of us dream big. But there’s a line that divides between being successful and dreaming to be successful. That line is earning and investing your earnings so carefully that it gathers you some great returns. So the knowledge of modern investments like stock market, real estate  should be taught in schools so that students learn this at an early age and make investing a part of their life by the time they graduate. Many rich personalities like Warren Buffett , Rakesh Jhunjhunwala have made millions through stock market investment. Such is the importance of investing, well enough to be included in the normal curriculum of schools.