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
“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
ROI= (30/100) ×100
ROI= (200/1000) ×100
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.