Bull or bear -- it does not really matter if you don't know which term suits you best. I firmly believe anyone can beat the stock market.
All you have to do is be disciplined and work with some basic principles.
The key lies in finding the right stock. Once you do, hold on to it for the long haul or till you get the price you wanted.
Four magic principles
1. Look for low P/E stocks
The Price to Earnings ratio tells us the price you are willing to pay for every rupee you may earn in the future.
In mathematical terms, P/E is the market price divided by the Earnings Per Share.
EPS = Net profit / Number of shares
P/E = Market price/ EPS
Common sense dictates we would like to pay a lesser price for every rupee we earn in the future. Hence, look for stocks with a low P/E.
When you buy stocks at low P/Es, you buy the shares at a lower price as compared to its earnings. Therefore, the probability of the price of the stock falling from that level is low.
Do remember, though, when I say stocks with a low P/E, it is relative to the industry/ sector.
For instance, 11.8 may be considered a low P/E for an Infosys stock but a high P/E for a Chambal Fertiliser stock.
Also, an older, larger, more established company may have a lower P/E than a newer, fast-growing company.
You will get these figures in financial dailies like The Economic Times, Financial Express, Business Standard and Business Line.
To understand these ratios in detail, read Spot a good stock. Win big!
2. Growth story
It's not too difficult to find out the rate at which your stock is expected to grow. What's difficult is figuring out if the stock will actually grow or not.
A simple way of doing this is finding out at what rate the industry is going to grow. Then see if the company you want to invest in has the capability to grow at the same momentum.
Look at the past. If the industry was growing at 10% per annum, what was the company's growth in terms of the earnings? Compare the two. Was it the same or was it higher? If it was lower, you have to think again.
However, to see a company's earnings increase, you have to take into account numerous factors.
Is there going to be a government policy that will go against the company? Is there a growing market for the company's goods? Does the management have vision? Is it capable of taking on challenges? Are they competent enough to survive and flourish in the industry?
Obviously, this will require a fair amount of time on your part. Read financial magazines and newspapers. Surf the Net for financial information. Watch television channels like CNBC. Read up on the company and industry. Get hold of the balance sheet and annual report.
When the market rises too fast, it usually results in a strong correction (a reversal in prices, which means the market comes down and the prices of shares fall).
3. Asset backing
Look at the type of assets -- both tangible and non-tangible -- that the company possesses.
Tangible assets are the ones the company has in physical form: land, buildings, machinery, investment and cash.
Intangible assets are those that cannot be touched or seen. Examples include the company's goodwill and its brand name.
If the company has good asset backing, it is less likely to go bankrupt or turn out to be a fly-by-night operator.
In simple words, when you advance money to someone, you try and get some type of security for that money. The same principle applies here. You try to get some security for the money you are putting into the company's stock.
4. A good trading outlook
You have to consider the liquidity of the stock before investing.
A company might have a low P/E, high growth rate, good asset backing, but if it is not traded regularly on the exchange, then it is very tough for you to dispose it at a fair value at any given point of time.
It's a simple question of demand and supply. When demand is greater than supply, the price of the stock increases. When demand is less than supply, the price drops.
If those holding the stock do not want to sell, the buyers end up offering very high rates.
Also, if a company is not well traded, you will have a problem accessing information on it. It would not be well researched since it is watched by very few people.
Get cracking
Don't just look at any of the above factors in isolation. Take all four into consideration when taking a call on whether or not you should buy a stock.
You might find all this too tedious. But do remember you are living dangerously when you make decisions based on 'tips' you have heard/ read. The chances of you losing your money are much higher.
Investing is serious business. You should take it seriously.
Note: Vatsal Ramaiya is an MBA student who plays the stock market. These views and the strategy mentioned reflect the author's personal convictions. They are not a sure-fire way to make money in the market.
