Turning 18 means nothing, you are still a little kid and should be listening to your parents and drinking milk twice a day. This would be the case if my mother was president, however the Indian government considers 18 to be the age when one legally becomes an adult, can drive a car, vote, and invest in the stock market among other things. Of course the latter piqued my interest significantly since what could be more puzzling than earning money by spending money? So I sat down with my dad and began annoyingly questioning him about every single detail that I needed to know to begin investing/trading. Since I don’t want you all to come as close to getting disowned as I did, I would like to share a few important things that I feel helped me understand how the Indian stock market works and how to make informed decisions while investing. This is by no means a comprehensive list of all the things you need to know, just a few things that I feel beginners like you and I can benefit from knowing.
I think it’s virtually impossible for a person to have turned 18 without atleast hearing/ reading the words Sensex or Nifty 50 atleast once in their lifetimes. Be it glancing onto it while walking across the news channel or hearing your father mention it in a heated discourse with the guests. So before we tackle these seemingly daunting words let’s begin by asking what a share is and the difference between share and stocks. Simply put, a share is a unit of ownership of a company, so essentially by buying shares you become a partial owner of the company and earn money when the company profits and incur losses when the company does so too. While the words shares and stocks are often used interchangeably it is important to remember that shares are the building blocks of stock, representing individual units of ownership whereas stock can refer to shares in one or multiple companies, or even the market as a whole. Thus, it is helpful to know the subtle differences to engage in better dialogues as well as be aware of the intricacies. Consequently the place where shares are bought and sold is known as the stock exchange or the share market.
India has 2 major stock exchanges in India which are the Bombay Stock Exchange (BSE) and National Stock Exchange (NSE). These are like malls where instead of clothes and shoes, people buy stocks with the help of their personal shopper i.e. stock brokers. Nifty 50 and Sensex act as indicators of the current performance of the market by taking the current measured prices of specific companies and pitting them against their previous prices. Of course there is some complex calculation involved in calculating the actual Nifty 50 or Sensex numbers but in essence, they are an index which gives some indication on the current state of the market by evaluating the effect on a few big companies in it. Nifty 50 trades on the NSE and measures the 50 most influential companies currently whereas Sensex trades on the BSE and is a measure of 30 established and giant firms like Tata Steel, ITC etcetera. Thus, they both provide relevant and slightly varied information about the share market since Sensex is normally believed to be more for the cautious traders whereas Nifty 50 is more modern and for the savvy and growth-focused trader.
With this background information it is normal to get tempted to jump into investing the stock market but before one rushes into purchasing shares there are many other important values that you must consider before risking your money. While it is obviously important to qualitatively assess the future of the company by researching on it and seeing if their goals have a future, CEO have the right mindset etcetera it is also important to crunch some more numbers and look at a few more ratios before making an informed decision. Most brokers, such as your bank or other external sites/people will offer you these values alongside many others to help you make a more informed decision. The three figures I believe are very important to look at are the Debt to Equity ratio, Price to Earnings ratio and Price-to-book ratio.
The price-to-book ratio, or P/B, contrasts the market price of a company(price of the share) with its book value, which is the theoretical value of the company’s assets. A low P/B (about 2-3 for Indian companies) could point to a great deal, whilst a high one might indicate that you’re paying an inflated price and might be slightly late in reading the news or gaining information about the companies potential profits. The Ratio of Price to Earnings (P/E): This indicates how much investors are willing to pay for each rupee of a company’s earnings. In the Indian market, a higher P/E ratio (usually in the range of 15–25) indicates that investors may anticipate rapid growth, whilst a lower ratio may indicate a hidden gem. The Ratio of Debt to Equity (D/E): It lets you know how much of the business’s activities are financed by debt as opposed to equity, or the company’s own funds. a reduced D/E ratio—ideally less than one indicates that the company is financially stable whereas any higher is considered a bigger risk to invest in.
I am not exaggerating when I say this is not any advanced tips or cheats into investing the stock market as pretty much any serious investor and broker knows these basics and use them on a regular. It is very important to research more, experiment, and be updated on the news to actually gain steady profits from the stock market. Thus, do not simply read this article and download Zerodha, instead talk to people who are experienced and begin your journey under their guidance.
