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Tips for Beginners in Stock Markets

Updated: Mar 12, 2020

Following are some points to be kept in mind while building a portfolio in equity shares:

1) Never have more than 10% exposure to a particular stock and 20% exposure to a particular sector. All investments have different associated risk. Any company can go bust anytime. There are many examples in our market for such companies. Even if one of the portfolio stock goes bust, it shouldn't impact your overall portfolio.

2) Diversify into multiple sectors to stabilise the portfolio. Not all sectors will get interest from buyers at all point of time. For example, when rupee weakens, exporters will get benefited and importers will be impacted. Similarly crude going up or down will impact certain sectors. During bear markets, defensive sector will get more interest among buyers. In bull market, all will focus to cyclicals, growth sectors at that time.

3) Have reasonable expectations from portfolio and DO NOT chase multibaggers. Buy into good companies and give time, they will give multibagger returns in the long run. Longer the holding period, higher the returns will be, as long as good companies are picked in building portfolio.

4) Always buy in regular intervals on when there is fall in market. Avoid buying shares just because money is available in demat account. Control the urge and wait for the correct price to deploy the cash. Never chase the stock, let it come to your price.

5) Being contrarian has advantages, one can get a share cheaply, but need to ensure that issues are temporary at the company and they can turn around. Note that there won't be smoke without fire, just because a share is falling, don't go and buy. Try to understand the reasons for the fall.

6) Markets will provide opportunities always. Don't regret for missed opportunity. Great time to buy a good company is when it goes through tough times.

7) Avoid PSUs as their objective is not to maximise shareholder returns but to provide service to common public as the promoter is Govt. Eg. Upstream companies will mostly take the burden of higher crude prices as govt don't want public to bear the cost as it will impact their electoral politics.

8) Analyse Profit & Loss Statement, Balance Sheet and Cash flow. Don't just go by P&L. Company might paint a rosy picture with P&L and only when checked Cash Flow, there won't be any cash generated by operations, so they had to meet working capital needs through financing. Also spend some quality time in going through last one or two annual reports of a company to under the sector, management commentary, risks associated with industry/company, future plans. Some management will change their views frequently or give unrealistic outlooks. So always check more than one annual report and understand the progress in capex plan, like construction of new plant etc.

9) Ideally look for companies with no debt or less debt or manageable debt. Also look for decent growth in top line and bottom line in last few quarters and last few years. Check how they have performed operationally (EBITA margin) over the years.

10) Sectors with high entry barriers are good as it keeps the competition in check.


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