This article will provide an in-depth analysis of how to select stocks for investment in India. There are thousands of stocks in India in both NSE and BSE, but did you know that 40% of the trading happens in only those Nifty 50 stocks and the remaining 60% of trading happens in thousands of other stocks.
We are going to divide this article into two parts, one is for complete beginners in the stock market and the other is for investors who are there in the stock market for some time and have some experience.
How to select stocks for investment in India: For beginners
Most beginners don’t know how the stock market works and how the trends and cycles work in the stock market, and how the stocks react to particular news or unlikely event.
Most beginners choose stocks based on recent movements in the stocks, but not because of the fundamentals of the stocks. For example, if there is news in social media or in the news that a stock has moved 20% in a day, 30% in 3 days, and 50% in five days then beginners will immediately buy those stocks in the hope that those stocks will increase further. But in reality, what happens is the stocks will hit the lower circuit after you bought those stocks.
There are thousands of stocks in the stock market to choose from, but we would suggest beginners to choose from the Nifty 50 stocks, as they are very strong in terms of fundamentally and financially.
While selecting a stock for investment, you need to follow a top-down approach.
Top down approach
- Sector.
- Industry.
- Company
First, you need to do a sectorial analysis, in which sector do you need to invest? which sector will grow in the coming years, which sector will have a good future? after that you need to do industry analysis and then company analysis for which company you need to choose in that sector or industry.
There are many many sectors, but if you want a quick snap of this, let’s take a look.
Sectors in Nifty 50:
- Financials & services – 38.2%.
- IT – 16.7%.
- Oil & Gas – 12.4%.
- Consumer goods – 10.5%.
- Automobile – 5.1%.
- Pharma – 3.3%.
- Metals – 3.5%.
- Construction – 2.8%.
- Cement & cement products – 2.51%.
- Telecom – 2.11%
- Power – 1.65%.
- Services – 0.66%.
- Fertilizers & Pesticides – 0.53%.
These are all the sectors in Nifty 50. Now, focus on four major sectors financial services, IT, oil & gas, and consumer goods. These four sectors were put together to accommodate for more than 75% of the nifty 50.
Then you need to shortlist which sector is good for you, it’s a process that comes with practice. From where can you get to know which sector is good for investment right now? for that you can watch the news, various youtube videos, or from various articles available on google.
How to select a sector for investment
So now let’s understand how one single budget decision is going to impact so many industries. For example, if the government has announced that they are going to increase the construction of highways in the coming years and announced some budget for that.
What are sectors that will have an advantage from this decision?
Construction and cement sectors will benefit from this, and in those sectors, industries like steel, cement, cement products, and logistics industries will benefit. In this way, you need to analyze every decision taken by the government and apply it to the stock market.
After selecting the sector, you need to select an industry and compare the stocks in that industry to choose one stock.
How to select a stock for investment
After selecting a sector and industry, still it is very hard to select a particular stock because there are a lot of stocks in each industry.
There are so many financial indicators to select particular stock and to compare that stock with other stocks in that sector, but from a beginner’s point of view, it is very hard for them to select stocks based on financial indicators.
Then how to select a stock for investment?
Step 1: Go to the nifty indices website.
Step 2: Select Indices & then Sectorial indices.
Step 3: After selecting sectorial indices you can see different sectors indices which are in Nifty. If you want to invest in the IT sector, go to the Nifty IT index, and scroll down to where you can find an image with the heading of sectorial distribution, if you double click on that image you can see an image with the weightage of each stock.
In the above image, you can see that Infosys has the highest weightage followed by TCS. So you can invest in either of the stocks.
This is the easiest way for beginners to select stocks for investment in India.
How to select stocks for investment in India
Till now we have discussed how to select stocks for beginners, But from now on we are going to discuss some advanced financial indicators on how to select stocks for investment in India.
The process of selecting sector and industry is the same for either beginner or some experienced investor. Just keep one thing in your mind, is this sector have a good future? Are there good growth opportunities for this sector in the future? Are there enough opportunities for this sector to grow?.
For example, the IT sector will be there forever, because of technological advancement and humans cannot live without technology. The other example is the multiplex industry, the industry is slowly fading away as OTT platforms are gaining so much attraction these days.
After selecting the sector and industry you need to select a stock, there are a lot of stocks in each sector. So on what basis do you need to select a particular stock from those many stocks?.
Well, you need to use some financial indicators, management analysis, fundamental analysis, and the company’s performance in the past to select a particular stock.
How to filter a stock for investment
Till now you have selected a sector, industry and are confused to select a particular stock. Well, don’t worry I am here to help you with how to select a particular stock.
firstly, you need to compare some important financial indicators to select a particular stock.
- EPS
- PE
- P/CF
- PEG
- ROE
- ROCE
EPS
EPS stands for earnings per share.
EPS = Net profit / Total no of shares
A higher value of EPS is positive for a company.
For example EPS of two companies named ‘A’ and ‘B’ is 20 and 30, which means company ‘A’ is generating 20rs profit for each share, and company ‘B’ is generating 30rs profit for each share.
Higher the profit is better for the company so higher EPS is positive for a company.
EPS is a basic valuation method, you need to consider a lot of other indicators along with EPS while comparing stocks.
PE
PE stands for the price to earnings.
PE = Current share price / Earnings per share
A lower value of PE is positive for a company.
For example, the PE of two companies named ‘A’ and ‘B’ is 15 and 20, which means that an investor is paying 15rs for company ‘A’ and 20rs for company ‘B’ to generate 1 rupee of profit.
A low value of PE signifies that the company is undervalued.
The main thing to remember before using the PE ratio is, it is used only for the stocks in the same sector. Don’t use it to compare the stocks in two different sectors.
P/CF
P/CF stands for the price to cash flow.
P/CF = Current share / Cash flow per share
Cash flow per share = operating cash flow / Total no of shares
Don’t worry you don’t need to calculate every ratio by using formulas, you can easily find them on websites like Screener and Ticker.
The reason why we are explaining formulas is that you can understand better, but don’t worry about the formulas just understand the concept.
low P/CF value is positive for a company.
Use P/CF to compare the stocks within the same sector. A lower value of P/CF means the company is undervalued.
PEG
PEG stands for the price to earnings to growth ratio.
PEG = PE / Anuual EPS growth
The lower value of PEG means the company is trading at attractive valuations.
For detailed info on PE, P/CF, and PEG: Read here.
ROE
ROE stands for return on equity.
ROE = Net profit / Total equity
The higher value of ROE is positive for a company.
ROE measures the efficiency of the company on how efficiently the company is using its funds to generate profits.
ROCE
ROCE stands for return on capital employed.
ROCE is also the same as ROE, the main difference is ROE doesn’t consider the debt of the company, whereas ROCE considers the debt of the company.
If a company has a debt then using ROCE makes more sense than ROE, because ROE doesn’t consider the debt of the company.
These are the main financial indicators or valuation methods to use while selecting a stock within the same sector.
Also read: 5 important financial ratios.
Fundamental analysis
To select a stock you also need to consider the fundamental analysis of the company.
The main things to consider in the fundamentals of a company are:
- Profits growth.
- Debt to equity.
- Sales growth.
- Shareholding pattern.
- company performance.
- balance sheet.
- Management analysis.
Sales growth & profit growth: while analyzing a stock, analyze the 5 years profit growth of the company along with sales growth. If the company is consistently generating good sales and profit then the company is performing well.
Debt to equity: The important thing to consider while investing in a company is debt to equity, the lower value of debt to equity is positive for a company.
shareholding pattern: If the promoters are gradually decreasing their stake then it is a very big negative for a company and if the promoters are increasing their stake then it is a positive thing for the company.
Balance sheet: Balance sheet analysis if complete different topic so I leave a link to other article Balance sheet analysis.
Management analysis: The most important for any company is management, if the management is good then the company will definitely perform well. So before investing in any company do analyze about key members in management, what is their history, experience, qualifications, and achievements.
Frequently asked questions
Can I invest 100 RS in share market?
Yes, you can invest 100Rs in the share market. You can even invest 1 rupee if there is a share priced at 1 rupee and in multiples of the share price.
Which app is best for trading?
Upstox is best for trading, you can this link to download Upstox. In upstox, you can get daily news of the stocks which are on your watchlist so that you can stay updated about the company.
