So, you’re thinking to start investing. But before you enter, are you prepared? Do you actually meet all the requirements that will make your investment journey smoother? In this post, we’ll discuss seven such things that you should do before you start investing.
1. Build an Emergency Fund
As the name suggests, an emergency fund is money that you put aside for emergencies. It is the money that you can reach out to during your hour of need and pay for those unforeseen and unexpected expenses such loss of a primary job, medical emergency, personal emergencies or even a car breakdown.
As a thumb rule, before you start making investments for your long-term goals, first you should build an emergency fund which should be greater than at least three times your monthly expenses. Keep this money aside in a separate account. You can read more about how to build an emergency fund here.
2. Have a budget & know your cash-flows
If you want to enjoy a healthy financial life, it’s really important to have a balance between your savings and your expenses. Budgeting your monthly finances and knowing your ‘cash’ inflow and outflow can help you plan how much you can afford to invest per month.
A simple profit and loss formula that you can use in your day-to-day life to understand your cash position is ‘Revenue — Expenses = Profit”.
Here, your total revenue (inflow) is the sum of all the income that you make from different sources like your job, business, interests on savings/fixed deposits, dividends, rental income, etc. And your total expenses (outflow) include your rent, groceries, transportation, bills, EMI’s, household expenses, etc.
When you deduct the total expenses from your net revenue, you’ll be able to find out how much you keep per month or year. And after calculating this, you can plan where to allocate this money and how much to invest in different investment options.
Note: If you are struggling with your personal budgeting, one of the easiest strategies that you can use to figure out how much should you save is the 50/20/30 Strategy.
50/20/30 is a really simple and straightforward budgeting strategy that can help you to define how much should you spend on your essential spendings (needs), savings and finally on your preferences (wants and choices). According to 50/20/30 strategy, you should allocate:
50% of your monthly income on ‘Needs’ (like rent, food, etc)
20% of your monthly income on ‘Savings’ (like your retirement fund, investments, etc)
And the remaining 30% of your monthly income on your ‘Wants’ (like traveling, dining out, etc)
First of all, please note that not all loans or debts are bad. Here, we are talking about high-interest debts. For example, if you have taken a personal loan, it’s interest rate may vary from 13–18%. Similarly, a credit card company may charge you even higher interest on the outstanding amounts.
It doesn’t make much sense to invest if the profits that you make on your investments are lesser than the interests that you pay on your debts. For example, if your returns are 12% and you’re paying 14% as interest on your previous debt, then overall you’re in a loss. Here, instead of investing, it will be better to use that money to pay back and become debt-free.
Before you start investing, try to minimize or eliminate debt, especially high-interest debts and your credit card debt. These interests can kill your investment profits.
4. Take a health Insurance
When people are in the best of their physical health, an obvious question among them is why should they invest in health insurance? Paying a premium plan for ensuring health may seem an unnecessary expenditure.
However, accidents or health issues may come up anytime unexpectedly which can put a lot of financial and mental pressure. Further, it is a fact that, as you grow older, health issues come along with it. And hence, it is highly necessary to incorporate healthcare planning within the budget of your family financial planning.
Before you start investing, make sure to take health insurance first. Being medically insured can help you avoid facing financial instability in the future and enables you to get the best health treatment.
One of the most critical things to do before you start investing is to define your investment goals/priorities and making plans to reach them. Here, you need to know why you are investing. It will keep you motivated and ‘on-track’ to achieve your goals.
Now, by definition, an investment goal is a realistic expectation to meet the returns by investing predefined money for a fixed time frame. The keywords to note here are ‘realistic expectations’ and ‘timeframe’.
Before you put your money in any investment options, set your short-term and long term goals and make plans for how you’re gonna achieve them. The goal can be person-specific like planning for children education, retirement fund, buying a new house or even financial independence. Once you’ve set your goal, you can choose the best investment options that can help you reach these goals in your defined time horizon.
Everyone has a different risk tolerance level depending on their age, financial situation, priorities, etc.
If you are young and have a stable job, you might be willing to invest in more unusual ‘high risk, high return’ options. However, as you grow old/retire, you might not have a job or primary source of income and hence you might depend on your retirement fund for meeting your expenses. Here, you may not be willing to take a higher risk and choose safer investment options.
Before investing, you need to define your risk sensitivity i.e. whether you’ve are high, moderate or low-risk tolerance profile.
As different investment options have different degree of risks, you can choose your investment options depending on your profile. For example, if you have a high-risk tolerance, you may invest in stocks, mutual funds, real estate, etc. On the other hand, if risky investments keep you sleepless at nights, better to choose low-risk investment options like fixed deposits, PPF, bonds, etc.
Don’t dive in deep water if you don’t know swimming basics. Similarly, do not start investing your money, if you do not understand the elementary concepts.
Before starting your investment journey, make sure that you understand what is meant by stocks, bonds, mutual funds, diversification, liquidity, volatility, and other investing basics. Here, you do not need to become a finance geek or an accountant. However, you should have good enough knowledge of the industry to make intelligent decisions.
Hi, I am Kritesh, an NSE Certified Equity Fundamental Analyst and an electrical engineer (NIT Warangal) by qualification. I have a passion for stocks and have spent my last 4+ years learning, investing and educating people about stock market investing. And so, I am delighted to share my learnings with you. #HappyInvesting
It’s a known fact that the majority of the Indian population do not invest their money. Apart from little allocation in a few traditional investment options like gold, savings, fixed deposits or LICs, the involvement of Indians in the higher-rewarding investment opportunities like Stocks, mutual funds, ETFs is quite minimal. If we look into the equity market, hardly 2.5% of Indians are actively involved.
Now, according to the non-investing population, the two biggest reasons that stop them from investing are ‘lack of education’ and ‘lack of time’.
For the first part i.e. the lack of education, it might be a little fault of our education system, somewhat of the parents but mostly of the individuals. Investing is not a rocket-science that only people with high-IQ can pursue. Anyone can learn and start investing. People should not always blame others if they are not ready to learn. There are a lot of free resources available online and offline, which is enough to get adequate investing knowledge.
Anyways, the other common excuse that most people make for not investing is that they don’t have enough time to invest. “No time to research where to invest!”. A few may even argue that setting up a trading account and making investments takes a lot of time which prevents them from investing.
“It takes too long to invest” — This is just another myth among beginners. However, it does not take as much time as every newbie assumes and investing habit can be easily adjusted in your day to day life.
If you can make time to go to the gym everyday, dining out every other day, partying on weekends, or going on vacations every three months, then stop saying you don’t have time. As a matter of fact, if you are ready to spend 2–4 hours every week, it is good enough to start and monitor your investments.
Further, even if you have a very hectic routine, you can steal a few minutes here and there. Like while traveling in your cab/metro, during your lunchtime, or even while having your coffee. At these time, instead of scrolling on facebook, you can do your investment research using mobile apps, which are super easy, fast and provides with all the facilities that you need.
Moreover, even if you are not ready to put a lot of efforts or time, there are still many easier routes to start investing. For example– investing in mutual funds or investing through Robo-advisors. If you believe that you won’t even be able to spend 2–4 hours per week for your investments, then pick a fund and start a monthly SIP. All these investment options do not take a lot of time.
Having no time to invest in a lame excuse for non-investors. The thing is these people never prioritize investing. They always keep procrastinating to invest for later, arguing that they do not have enough income/savings. Here, people are not investing because of the lack of priority, not the lack of time!
You are losing ‘Time’…
“Start investing early” — this is the best advice that anyone can give you.
When you begin investing early, time is in your favor and so is the power of compounding. You will be way ahead of your peers towards building your investment corpus if you start investing even just a few years prior to them.
When you are excusing not enough time to invest, you are losing time that could have been your biggest ally. Remember, time can help or hurt you.
Every week, I receive dozens of emails from people in their 50s or 60s who have never invested in the equity market and now planning to enter.
Now, by no means, I am saying that people in their 50s or 60s cannot invest. As a matter of fact, it’s never too late to get started. However, these people kept excusing ‘no time to invest’ during their adulthood, which later resulted in them not to invest at all.
If you are young, you have a great advantage. Instead of throwing it away by making a lame excuse, take the best out of it.
Besides, you do not need to have a high paying job or large savings to start investing. Even people with medium to low salary range can invest smartly to reach their goals. If you are not sure how much, then a monthly SIP of Rs 5,000 is good enough to begin. That doesn’t sound too much to invest, does it?
No one cares about your financial goals except you…
Your friends will encourage you to party harder. You relatives will emotionally charge you to buy a fancy car/house to impress them. Your neighbors will challenge you to live above your standards to match them. But no one will motivate you to save more or to invest more.
No one cares whether your net worth or total asset is growing overtime or not. Everyone is dealing with their own financials/hardships and they don’t have any time for you.
The only one who cares about your financial situation is yourself. If you do not take charge of your investments, no one else is going to do it for you. The only way to secure your future and have enough money in your bank account is by becoming proactive and responsible for your financials.
Closing Thoughts
Stop excusing that you do have spare time to invest, instead start acting. Everyone has the same 24 hours in a day. If you are not investing, it’s not because you don’t have time. It’s because you do not understand the importance of investing.
And five years from now, you’ll regret why didn’t you start investing early.
Hi, I am Kritesh, an NSE Certified Equity Fundamental Analyst and an electrical engineer (NIT Warangal) by qualification. I have a passion for stocks and have spent my last 4+ years learning, investing and educating people about stock market investing. And so, I am delighted to share my learnings with you. #HappyInvesting
While reading this incredible success of Zerodha, one obvious question among people is whether being the first mover in the discount business model, the biggest reason for the Zerodha’s success? How big is the actual competitive advantage for the first movers? In this post, we are going to discuss the same.
Who are First Movers?
First movers are those companies who are the ‘first’ in line to offer their products or services in the market. They are the ones to innovate and develop a product/service which was not available previously in the market. Further, they do not face similar competition like the ones in the established markets.
In many cases, such companies can build great brand recognition and loyal customers for their products/services during the time gap, i.e. before the competitors enter.
An important point to note is that first-mover advantage is here referred only to those companies who are able to scale and make establish a big market, not the ones who just started the idea but didn’t make it large.
I mean, Amazon might not be the first company in the online bookselling industry. A lot of small businesses might be selling books or their products online before its establishment. However, Amazon was the one who was able to capture a significant market, make an impact and hence, can be considered as an actual first mover in this industry.
A few other examples of the first movers in their respective industry can be Kindle (ebook selling), eBay (online auction), Apple (iPhone & iPads), Uber (taxi booking & ride-sharing), etc.
In India, companies like Flipkart, Oyo, Olx, Ola etc. are the ‘Regional’ first movers. Although they copied the concept from their global rivals, however, being the first mover in the Indian subcontinent region gave them an advantage.
Advantages of First Movers:
Being the first mover, a company can enjoy a lot of benefits compared to the later entrants. Here are a few of the best advantages of first movers:
Brand recognition: First movers can create a strong impression which can help them build a passionate customer fan-base and create a big brand recognition even before any competitors enter.
Price & Benchmarking: The first movers enjoy the advantage of setting up their prices for the newly offered products/services and creating their own industry standards/benchmark.
Technological advantages: Being the first mover and having no competition allows a company to give sufficient time to build a perfect product and get a head start. Further, they can also file proprietary or patent rights to continue enjoying technological advantages.
Control of resources: First movers can control the resources by doing a strategic partnership (or exclusive agreements) with vendors, supplier; renting the best locations, hiring most talented employees in their industry, etc. The later entrants may face difficulty to find similar resources.
Switching cost: If the customer has to cost a lot of money, time, efforts, or resources to switch from one product to another, it is considered as the switching cost. First movers can enjoy the benefits of switching cost by launching their products earlier. Here, even if a better product/service is available, the customer may stick with the old company, if the switching cost is high.
Although being a first-mover looks a lot advantageous for a firm, however, it has its downsides too. Here are a few cons of being a first mover.
In most cases, the later entrants or competitors can reverse-engineer, copy, or even improve upon the product/services offered by the first movers.
The first movers might take a lot of time to learn and innovate. On the other hand, the following entrants generally have a lower learning curve and can build the product faster.
The first movers might find it challenging to persuade people to try new product/services. However, later entrants can reduce this education cost.
The first movers can also face a lot of competition from the free riders. As the Imitation cost < Innovation cost, a lot of copy-cats can join the expanding industry to enjoy the upwards ride and reduce the profitability of the first movers.
The second movers or the competitors can avoid the failed steps made by the first movers and hence reduce their cost/expenses.
Is First mover a competitive advantage for a firm?
In the investing world, the competitive advantages are the ones which are sustainable for the long term, not for a few years.
Admittedly, being the first mover is advantageous and have a lot of perks. However, over time, the later entrants can destroy this advantage through reverse-engineering, workforce mobility, technical advancement, or even by merely copying the products/service offered by the first mover.
There’s one thing sure in this competitive world. First movers will not always be the only player in any industry. As they grow, a lot of new companies will enter that industry and try to eat their profits.
Further, a lot of big successful global giants were not the first movers. For example, Google was not the first search engine. It followed the model of Yahoo or Infoseek. Similarly, Facebook was a later entrant in the social media world after Friendster and Orkut. Even Starbucks or Cafe Coffee Day (CCD) is a copied business model of the famous local coffee chains. Still, these companies were able to dominate the market and establish a big brand and customer network.
Anyways, in a few cases, if the first movers can dominate a big market and establish a loyal customer base, they may retain a healthy growth level and profitability, despite new entrants.
Hi, I am Kritesh, an NSE Certified Equity Fundamental Analyst and an electrical engineer (NIT Warangal) by qualification. I have a passion for stocks and have spent my last 4+ years learning, investing and educating people about stock market investing. And so, I am delighted to share my learnings with you. #HappyInvesting
How to open a demat and trading account at Zerodha? (Updated: Aug 2019)
When I first started investing, I used ICICI direct as my stockbroker for opening my demat and trading account. Although I was happy with the facilities and platforms provided by it, I soon realized that ICICI Direct was very expensive.
Many times, profits were killed by the brokerages in ICICI direct. The worst part was paying too much of brokerage even when you were selling the stock at a loss.
Then I asked for feedback from my friends who were using SBI Smart and HDFC securities. They both were also paying high brokerages and suggested not to go with them.
Finally, after researching a lot, I opened my second demat and trading account at ZERODHA.
Zerodha is the biggest discount broker in India with over 10+ lakhs customers. It contributes to over 15% of all retail order volumes in India daily by trading and investing in NSE, BSE, MCX, and MCX-SX. The charges offered by Zerodha are nominal and the trading platform provided by it is also fast and friendly.
It charges a brokerage of 0.01% or Rs 20 per executed order, whichever is lower, irrespective of a number of shares or their prices.
This is way cheaper compared to ICICI direct which asked a brokerage of 0.55% on each transaction in equity. If you buy stocks for Rs 50,000 in ICICI direct, then you have to pay a brokerage of Rs 275 (On the other hand, Zerodha will ask for a maximum of Rs 20 any trade). Further, as this amount is charged on both sides of the transaction (buying & selling), hence you have to pay a total of Rs 550 for the complete transactions (which is way too expensive than Zerodha).
In short, if you are new to the investment world, I would recommend opening accounts in discount broker such as Zerodha so that you can save lots of brokerages.
How to open a demat and trading account at Zerodha?
Documents required to open a demat and trading account at Zerodha.
Here are the documents required to open a demat and trading account at Zerodha. I will recommend keeping soft copies of all these documents ready before you apply for opening the accounts as you’ve to upload them during the account opening process:
PAN CARD
Aadhar Card
Canceled cheque/ Bank statement
Your Signature on a piece of paper
Passport size photos
*Optional– Income proof: It is mandatory to submit income proof if you wish to trade in Futures and options – Equity, Commodity, and Currency. You can submit Form-16, IT acknowledgment copy, 6-month Bank statement or your latest salary slip as proof. Anyways, ignore this document if you are planning to invest only in just stocks, and not in derivatives, commodity or currency.
Account opening charges at Zerodha
Here are the account opening charges at Zerodha
Demat and Trading Account: Rs 300
Commodity Account: Rs 200
If you want to trade in both equity and commodity, then you need to pay an account opening charge of Rs 300+Rs 200 = Rs 500. However, if you want to trade just in equity (stocks), then you need to pay the charge of Rs 300 only.
Now, there are two ways to open a demat and trading account at Zerodha:
Online method
Offline method
Using the online method, you can open your account with Zerodha within 15 minutes, if you have all the required documents.
However, in the online method, to complete the eSign process, you will have to authenticate it with an OTP. So, make sure you have the number is linked to your Aadhaar. If not, you will not be able to complete the process. If the number linked to your Aadhaar is inactive, or if you don’t have any number linked, then you can visit your nearest Aadhaar Seva Kendra to get it updated.
Anyways, if you don’t want to use your Aadhaar, you can still open your account via the offline route. However, I would recommend you to open online as it is fast.
In the trading world, you need to be tech-savvy and comfortable with doing things online. All the transactions (buy/sell) etc that you’re going to perform in future, once your account is opened, will be online and through advanced trading platforms. They will require you to be technically smart. And therefore, start taking the online route as you can’t ignore the digital path in the future.
How to open your account with Zerodha Online?
Short Answer:
First of all, let me give a short answer on how to open your account at Zerodha before my step-by-step explanation.
On this page, the front step is to signup using your mobile number and verifying the OTP. Then you’ll be required to enter your PAN, bank account, Aadhar verification, and personal details to continue with the signup.
All the instructions are clearly mentioned in the each-step of the account opening page. If you are good at reading and following instructions efficiently, then you do not need to read this entire post. Just go to the account opening page, follow the instructions, upload the documents and your account will be opened.
Besides, if you face any difficulties while opening an account online, you could contact Zerodha at – 080 4913 2020.
A Quick Intro to DigiLocker:
While opening your account online with Zerodha, it will ask you to connect with your DigiLocker account. However, if you are new to DigiLocker, let me give you a quick introduction about it.
I was quickly impressed with DigiLocker concept when I first heard about it in early 2017. DigiLocker is an online service provided by the Ministry of Electronics and IT, Government of India under its Digital India initiative. I always keep this app on my mobile phone and let me tell you why.
If you live in a city, many times, you may face a similar situation like this. You went out to buy some grocery from a nearby shop or to drop someone. And because of a hurry, you forgot your wallet. This means that you don’t have your Driving license or vehicle registration doc with you. Next, if a traffic police stop you, then it might be a little trouble for you to explain to them why you traveling without docs.
However, if you have the DigiLocker app on your phone, you can show the driving license and vehicle registration from the app itself. Motorists can show docs in Digi locker during a traffic check as it is provided by government of India. Moreover, it is more secure and acceptable by traffic police compared to the camera pic that you keep in your phone gallery.
Overall, if you don’t have a DigiLocker account yet, I’ll highly recommend you to open one and download the app on your phone. It will help you to keep all your docs secured.
Moreover, this account is required while performing Aadhar verification during your Zerodha Account opening.
Detailed Step-by-step procedure to open your account with Zerodha online
Now that you’ve got a basic idea of how to open your account at Zerodha online and what are the docs/things required, next, let me give you a detailed step-by-step explanation of the process:
Step 1: Go to the Zerodha account opening page on your browser. Here is a direct link.
Step 2: Enter your mobile number to sign-up. You’ll receive an instant OTP to verify the mobile number.
Step 3: Enter your full name and email id. Please enter your email address correctly as you’ll again receive an OTP to verify your email id. This is the same email where you’ll receive all your future correspondence from Zerodha. Enter the OTP that you’ve received on your email to verify your email address.
Step 4: Next, enter your PAN and date of birth (DOB) details in the field provided.
Step 5: Complete the account opening payment.
For equity– you’ve to pay Rs 300 and for commodity, the charge is Rs 200. You can complete the payment through UPI or Net-banking/Card payment.
Tick the checkboxes according to your requirement and click on ‘Pay & Continue’ button. Make sure to uncheck commodity account, if you’re not planning to trade in it and save Rs 200.
After payment, you will see Congratulations message displayed on the screen and receive an email regarding the payment confirmation.
Step 6: After completing the payment, it will ask you to connect Aadhar details via Digilocker.
As already mentioned earlier, you need to create a ‘DigiLocker: Towards Paperless Governance’ account and link your Aadhar with it. Click on ‘Connect to DigiLocker’ and this will open a new page to sign up to Digilocker using your phone number.
If you already have an account, click on ‘Sign in’ option in the bottom.
Step 7: After entering your DigiLocker account, select the Aadhar card. If you’re just created a new account, enter your Aadhar number and verify using OTP received on your phone.
After that, you need to click on ‘LINK YOUR DIGILOCKER WITH ZERODHA’.
Step 8: Once your Aadhar verification is complete, a new screen will come displaying “Let’s finish the application”. Here, you need to fill up more details starting by filling up Bank Details i.e. your bank account number, bank name and branch’s IFSC Code.
Below that, you have to fill some details like Marital status, Father’s first name, Father’s last name, etc. After entering the details, click ‘CONTINUE’
Step 9: Next is IPV Verification over webcam/phone.
IPV or In-person-verification is a process where a depository participant in personal verifies documents and other details as per the law by SEBI. It is compulsory for every investor to go through the in-person verification process before opening a demat and trading account.
Here, they’ll display an OTP on the screen. You need to write down this OTP show on a piece of paper or your smartphone. Then, hold the piece of paper/ mobile phone with the code in front of your mobile phone/ webcam.
Click on “Start IPV”, then click on “Take Video” and finally on “SAVE IPV”.
Step 10: Next, you will have the option to either Digitally sign the application with Aadhaar (mobile OTP) or else print & courier it. I will suggest you selecting Aadhaar Option as it is a faster approach.
Step 11: Upload scanned copy of the documents: Bank Account Proof, your current signature, PAN. Income Proof is optional & only required if you want to trade Futures & Options, currency, and commodity.
Step 12: Next, it’s time to eSign. Click on ‘eSign Equity’ button and proceed to the next step. Enter the ‘Security Code’ received on your registered Mobile no/Email and click on ‘submit’.
Step 13: In the next window, enter your Aadhaar number, tick the checkbox and click on ‘Request OTP’ button. Here, enter the OTP number received on your mobile. With this the eSign process for Equity is complete.
Note: If you also opted for commodity trading account, repeat the same process by clicking on ‘eSign commodity’ as shown in ‘Step 12 ‘.
Step 14: Once you’ve completed the application sign up, you will have to download the Demat POA (Power of attorney) form, fill it up & send it to the address mentioned below.
Note: Although you can start trading from the day you receive your client-id and password, nevertheless, do send the POA and nomination documents as soon as possible. If your POA has not been received by Zerodha, then you won’t be able to sell the stocks (however, you will be able to buy stocks). Hence, do fill and send the documents as soon as you can.
Offline Account Opening Process:
How to open your demat and trading account with Zerodha offline?
You can also open your account with Zerodha offline.
In this approach, you will have to download application forms from Zerodha website, print out the forms, fill it up and sign it. If you need help at any point of filling out the application form you can call us on 080 4913 2020.
Here are the applications forms that you’ll need to fill and courier for account opening:
POA (Power Of Attorney) – Already included in the Application form above
ECN (Electronic Contract Note) for enabling Commodity segment – Already included in the application form 2
Nomination Form: In case you would like to appoint a nominee to your trading and DEMAT account like your wife, father, mother or any other.
The documents required for opening your account offline is the same as that of the online process. You need to get a photocopy of your PAN Card, Address proof (Aadhar Card, Driving License, Voter-Id etc), Cancelled Cheque/Bank statement, Income proof & Passport size photographs. You also have to cross sign as self-attest on all these docs. You can find the list of all acceptable docs for account opening here.
Once you fill it up and sign it, you have to send the application forms over to the Zerodha head office address:
Alternatively, you can schedule a meeting with a Zerodha representative at an address, date and time as per your convenience, by calling up the account opening helpline (080 4913 2020) or by placing a request with the sales manager assigned to you.
Here, a Zerodha representative will contact you and direct you to keep all such necessary documents ready at the decided time and place of the meeting. The representative would take all necessary signatures and self-attested documents/attachments as required to complete the account opening procedure.
I will recommend using the online method while opening your account. Zerodha is working towards the Digital India initiative and you should be a part of it too. Although online methods seem to have too many steps, they do not take too long. Once you’ve started the application form, you can build a flow and complete the form within 15-20 minutes.
The offline method is good if you do not have an Aadhar card and you want to provide another address proof like Driving license, Voter Id, etc. However, if you are living in a village/small city, it might be a little difficult for you to get a Zerodha executive. Moreover, the offline method can easily take 7-10 days to open a demat and trading account.
That’s all. These are the steps to open a demat and trading account at Zerodha, online and offline. I hope this post on ‘How to open a Demat and trading account at Zerodha?’ is useful to the readers. If you have any doubts, comment below.
Hi, I am Kritesh, an NSE Certified Equity Fundamental Analyst and an electrical engineer (NIT Warangal) by qualification. I have a passion for stocks and have spent my last 4+ years learning, investing and educating people about stock market investing. And so, I am delighted to share my learnings with you. #HappyInvesting
Two years back, I wrote an article on the difference between a demat and trading account. That article got a lot of attention from the readers, asking me to further elaborate on where to open these accounts.
As I didn’t cover which stockbrokers are suitable for which users in that article, I received a lot of queries from the readers regarding where to open demat and trading account. Most of them were beginners and therefore, I decided to write an article on the same which can be helpful for the newbie investors.
In this post, I’ll discuss the stockbrokers which I’ve personally used and researched. In my investing journey of the last five years, I’ve come across many trading platforms. From full-service brokers like ICICI direct, HDFC securities, SBI Smart etc, to the newer discount brokers like Zerodha, Upstox, 5Paisa, Trade Smart Online etc, I’ve reviewed them all. Moreover, being in the trading field, I need to remain updated with latest brokers and their charges.
By the end of this article, you’ll have a good knowledge of where should you open your trading and demat account. I’ll try to keep things as simple as possible while answering. In addition, I’ll also disclose which stockbroker I use for trading in stocks. Therefore, make sure that you read this article till the end. I’m confident that it will be helpful to you.
Difference between demat and trading account?
Before we dive in the topic, let me give you the smallest explanation of what’s the difference between demat and trading account so that we are all on the same page.
Just as money is kept in your saving account, similarly your bought stocks are kept in your demat account. When you buy a stock, it gets credited in your demat account. And when you sell it, it gets debited from the same. At any time, your demat account reflects all your holding stocks. By the way, demat account is the short form for ‘Dematerialised account’.
On the other hand, a trading account is a medium to buy and sell shares in a stock market. It is used to place purchase or selling order for a stock in the market.
For example, let’s say you want to buy some shares. Then, you need to enter details like ‘Which share you want to buy?’, ‘How many quantities of shares you want to buy?’, ‘At what price you want to buy that shares’, etc. And all these placings of buy/sell order is done using a trading account.
While trading in Indian stocks, you’ll need to have both demat and trading account. Anyways, both these accounts are linked and can be opened with any stockbroker. Further, in the era of internet, opening these accounts is really simple and fast.
Do you need a stockbroker to trade in stocks?
This is one of the frequently asked questions that I receive over email. Therefore, I needed to answer this one here.
Yes, you need a stockbroker to trade in Indian stocks.
You just cannot walk in the stock exchange to buy/sell your stocks. There are a lot of processes involved in the transfer and settlement of stocks for a satisfactory buying and selling experience of the participants. And here, stockbrokers plays an important role, along with the stock exchanges and regulators. Overall, you’ll need a stockbroker to trade in stocks.
What is a stockbroker?
Basically, a stockbroker is an individual/organization who is a registered member of the stock exchange and are given license to participate in the securities market in place of its clients.
From big banking corporations like HDFC Securities, ICICI Direct, Kotak securities etc to newer fastly growing startups like Zerodha, Fyers, etc all are examples of stockbrokers in India.
Stockbrokers can directly buy & sell stocks in the share market on behalf of their clients and charge a small commission for this service. However, the commission is minimal compared to the fast trading platform that they offer. Using these platforms, you can buy/sell stocks within minutes using your web/phone while sitting on your home sofa.
What are the types of stockbrokers in India?
There are two basic types of stockbrokers in India: Full-service brokers (Traditional Broker) & Discount brokers (Budget brokers).
Full-service brokers: These are traditional brokers who provide trading, research, and advisory facility for stocks, commodities, and currency. These brokers charge commissions as a percentage of each trade executed by their clients. They also facilitate investing in Forex, Mutual Funds, IPOs, FDs, Bonds, and Insurance.
A few examples of top full-service brokers in India are:
Discount brokers: These brokers just provide the trading facility to their clients for stocks, commodities and currency derivatives. They do not offer advisory services. However, these stockbrokers can save you a lot of brokerages while trading in stocks. Here, you need to pay a flat brokerage charge on the executed trades.
Here is a list of a few top discount stockbrokers in India:
Brokerage comparison while using full-service vs discount brokers
Let’s compare the brokerage charges of a full-service broker compared to a discount broker.
A full-service broker charges commission as a fixed percentage on every trade their clients execute. This commission can be somewhere between 0.25–0.55% of the overall trade. Here, the bigger is the transaction, higher is the brokerage.
On the other hand, the discount broker offers a flat brokerage charge. This charge can be somewhere between Rs 10–20 per trade.
Moreover, these charges are applicable on both sides on trading. Therefore, when you buy a share, you’ve to pay brokerage and when you sell these shares, you again have to pay these charges.
For example, full-service broker ICICI Securities that charges 0.275% as brokerage on Intraday trading. Therefore, the total brokerage in a trade will be 0.275%* 2 = 0.55%, if we include both buying and selling.
If you make an overall transaction of Rs 5 lakhs per month with ICICI direct, the total brokerage in a year will be equal to 0.55% * 5,00,000 * 12 months = Rs. 33,000
Now, let us look at the brokerage charges offered by discount brokers. The popular discount brokers in India like Zerodha or Upstox charges Rs 20 per trade.
Let us assume that you make 20 trades per month using such discount broker. Here, your total brokerage in a year will be Rs 20 (brokerage) * 20 trades per month * 12 months = Rs 4,800.
Clearly, you can notice here that you can save a lot of brokerage charges while opting for discount brokers. Moreover, both these brokers provide a similar trading platform and hence overall experience is not much different. Overall, you are paying some un-necessary brokerage while trading with full-service brokers.
What factors to check while selecting your stockbroker?
Brokerage charge is one of the biggest factors to look while picking your stockbroker as an expensive broker can hurt you financially.
Apart, the second biggest factor to check is the reputation of the stockbroker. A stockbroker with a long history of a reliable trading platform and good customer service should be preferred.
When you are opening your trading account with a stockbroker, it’s a long term relationship. You might trade in stocks for years after opening your account. And here, you do not want your brokerage firm to be shut down in between and all your bought equities getting trapped with them. Therefore, while picking your stock broker, first always check the reputation and reliability of the stockbroker. A simple google search or reading the reviews by the existing users can help to find red flags.
Besides, you need to look into their web and mobile trading platforms, advisory services (if you are looking for trading advice), customer service and other perks offered by that stockbroker like research reports, trading/investing education, etc.
Where should you open your demat and trading account?
By now, you would have got a decent idea regarding stockbrokers in India. Next, let’s discuss the central topic of this article- where should you open your demat and trading account.
If you are looking for multiple services like shares, mutual funds, bonds, currencies, fixed deposits, commodities etc along with research reports and do not mind paying a few extra bucks for additional services, then you should open your account with full-service brokers like ICICI direct, HDFC securities, etc.
However, personally, I believe that if you planning to trade just in stocks (or commodities), opening accounts with discount brokers is more advantageous. They offer a fast trading platform with a low brokerage charge which helps traders to save a lot of money.
Moreover, with the rise of the internet, most of the information that you need to make trading/investment decisions are freely available online. If you want to read the research reports on companies, they too are freely available on websites like Trendlyne, markets mojo, etc.
Note: If you really need advisory to buy and sell stocks, it’s better to go with expert advisory services in this field, who can offer you personalized services rather than relying upon these big corporates for whom you might be a very small client.
Which stockbroker do I use?
I use Zerodha discount broker for making all my traders.
Initially, I started my investment journey with ICICI direct. The reason I opened my account with ICICI was because of their good reputation and 3–in-1 account service facility.
3-in-1 means that you can open your saving, demat and trading account all at once. So, while opening your saving account with ICICI bank you can apply for the other two accounts as well.
I was happy with the services offered until I realized that I was paying too much brokerage charges and a chunk of my profit was paid unnecessarily to ICICI direct. Then, I started researching other stockbrokers where I can save these charges. Finally, I switched to Zerodha, the discount broker and I’m happy with the trading platform and services that it offers.
Other Frequently Asked Questions (FAQs) regarding trading and demat accounts.
How to open your demat and trading account?
Opening your trading and demat account is completely online, paperless and hassle-free. If you already have the soft copies of your documents (PAN card, aadhar card and saving account passbook/check) on your mobile/laptop, you can open these account within an hour. Simply visit the stockbroker website and apply for an account.
In fact, you can open as many trading accounts as you want with multiple stock brokers. If you wish, you can have one account with a discount broker and another with a full-service broker.
However, keep in mind that you have to pay annual maintenance charges (AMC) for all your active accounts. Generally, this AMC can be between Rs 300–700 per year (lower for discount brokers). Therefore, if you three accounts, you might have to pay a maintenance charge between Rs 900–2100 per year, even if you are not actively using all your accounts.
Can I switch my previously purchased stocks from one demat account to another?
Yes, you can switch your stocks if you are planning to migrate from one demat account to another.
Here, you have two options. Either, you can fill the DIS (Delivery instruction sheet) with information about the new demat account number and submit it to your previous stockbroker. Once filed correctly, they’ll transfer the shares.
Else, you can do it online using the EASIEST facility available on the CDSL website. CDSL is the central securities depository based in Mumbai. EASIEST allows you to transfer shares from one demat to another demat account with simple clicks once you have created your account and linked your stock brokers. Here’s the link to the portal and instructions regarding the same.
How to close your demat account?
Probably the least asked questions. However, I thought to mention this here to complete the article.
To close your demat account, you can fill the Account Closure Form available on your stockbroker’s website and submit it. Generally, it takes between 7–10 days to close your account.
Note: Before closing your account make sure that you don’t have any shares on negative balance in your account. You can have a negative balance if your account was inactive for the last few years and you didn’t pay the AMC. Further, if you have any stocks in the account, either sell them or transfer it to your another active account before closing this one.
Closing Thoughts
In this online era, buying and selling stocks is as fast as the click of your fingers. All thanks to the online stockbrokers.
There are many stockbrokers available in India and through this post, I tried to help you how to choose a broker for trading in stocks. If you still have any query regarding where to open your demat and trading account, feel free to comment below. I’ll be happy to help you out.
Hi, I am Kritesh, an NSE Certified Equity Fundamental Analyst and an electrical engineer (NIT Warangal) by qualification. I have a passion for stocks and have spent my last 4+ years learning, investing and educating people about stock market investing. And so, I am delighted to share my learnings with you. #HappyInvesting
While investing in a company, one of the most critical factors to look at is its growth rate. At what percentage the company is estimated to grow in the upcoming years? This is because, as the company grows & generate more profits, generally, your investment will grow along with it. Moreover, it’s not a viable strategy to invest in declining companies or the ones with no significant growth aspects.
But how to calculate the growth rate of a company?
A common approach that most investors follow is to look into the historical growth rate. Here, they try to find out the rate at which revenue, earnings, etc are historically growing, to assume a similar growth rate in the future. Although past performance doesn’t guarantee future growth, however, it can give you a rough estimation if you expect the company to perform similarly in the future. Here, investors can use the compounded annual growth rate approach to define growth.
However, forecasting growth based on such estimations may not always be valid. Besides, the estimates can change depending on the ‘number of years’ that you’re considering. For example, past 3-years, 5-years, and 10-years historical growth rate might be totally different. Which one should the investors focus while forecasting the future?
A better approach while studying growth is to look into the sustainable growth rate (SGR) of a company which focuses on different factors like earnings, shareholder’s equity, payout etc to find out the growth percentage of a company. But what exactly is a sustainable growth rate? This is what we are going to discuss in this post.
Sustainable Growth Rate (SGR)
The sustainable growth rate is the maximum growth rate that a company can sustain using its own resources i.e. without financing the growth using debt or equity dilution. It is calculated as:
Return on Equity(ROE): ROE is the amount of net income returned as a percentage of shareholders equity. It can be calculated as: ROE= (Net income/ average stockholder equity). ROE shows how good is the company in rewarding its shareholders. A higher ROE means that the company generates a higher profit from the money that the shareholders have invested.
Retention Rate (RR): This is the percentage of net income that is retained to grow the business, rather than being paid out as dividends. Retention rate is calculated as: RR= (1 — Payout ratio) = ( 1 — DPS/EPS), where DPS is the dividend per share and EPS is earnings per share.
For example, if a company ABC has a ROE of 15% and payout ratio of 40%, then its sustainable growth growth rate can be calculated as: SGR = 15 * ( 1–0.4) = 15 * 0.6 = 9%.
Ideally, the growth of a company funded by its own resources is the best form of growth compared to any other leveraged growth options. The later scenario may lead to financial stress and in the worst case, bankruptcy.
Moreover, any company can grow at a faster if it takes a lot of debt and spends on marketing, new product development, acquisitions, etc. However, returning that debt can be a troublesome process if it’s business model is not that strong.
By looking into the SGR of a company, Investors can find out its long-term growth, current life cycle stage, cash flow projections, borrowing & dividend allocation strategies, etc.
Maximum SGR:
According to the sustainable growth rate formula, SGR = ROE * RR = ROE* (1 – Payout Ratio)
Here, when the payout ratio is zero, the SGR becomes equal to the ROE of the company. You can maximize the sustainable growth rate by increasing ROE or decreasing payout (i.e. retaining more earnings rather than paying out as dividends).
Technically, a few ways to maximize SGR is by increasing sales & profit margin, managing account payable & receivables, efficient inventory management, etc. However, a point to note here is that a high SGR is always difficult to maintain. As the company matures, it cannot sustain similar high past growth rates.
Closing Thoughts:
An efficient management’s goal is to grow the company at its sustainable growth rate. If the SGR is 15%, the company can safely grow at this percentage per annum without taking any additional financial leverage. It can be considered the ceiling growth rate of a company while using its own resources.
Hi, I am Kritesh, an NSE Certified Equity Fundamental Analyst and an electrical engineer (NIT Warangal) by qualification. I have a passion for stocks and have spent my last 4+ years learning, investing and educating people about stock market investing. And so, I am delighted to share my learnings with you. #HappyInvesting
Picking a winning stock that can give consistent returns for many years requires a lot of analysis and research. However, you can simplify the research process if you have an investment checklist.
Having a reliable checklist for picking stocks can reduce the chances of missing an important detail that you should have studied before investing in the stock. As Charlie Munger, Vice-Chairman of Berkshire Hathaway has famously quoted:
“No wise pilot, no matter how great his talent and experience, fails to use a checklist.” — Charlie Munger
In this post, we are going to discuss ten key questions to ask before purchasing a stock by every stock investor. Let’s get started.
Quick Note: Although there are hundreds of points to check while picking a stock to invest, however, most of them can be categorized among the ten questions listed below. Anyways, by no means, I claim that this is the best checklist for picking stocks. My suggestion would be to study the investment checklist given below, improvise and make your own list of questions. Further, for simplicity, I’ve not included financial ratios.
10 Questions to ask before purchasing a stock.
Here are the ten key questions that every investor should ask before investing in a stock.
1. What does the company do?
What are the products/services that the company offer? Do you understand the company’s business model? How does the company actually make money? What are the top/best-selling products of the company?
2. Who runs the company?
Who are the promoters/owners of the company? It the company a family owned or professionally managed one? Who is managing the company? What are the credentials/background of CEO, MD, Board of directors and the management team? What is the shareholding pattern of the company?
3. Is the company profitable?
How much profits did the company generated in the last few years? How are the company’s gross, operating and net profit and what is the profit margin at each level? Is the profit of the company growing over time or stagnant/declining?
4. Does the company have a sustainable competitive advantage?
Does the company have a moat like intangible assets, customer switching cost, network effect, cost advantages or any other sustainable competitive advantage that can keep the competitors away from eating their profits?
5. How was the past performance of the company?
How is the company’s financials in the past few years? What’s the trend in the company’s income statement and cash flow statement? How are the sales, EBITDA, Cash from operating activities, free cash flow and other financial metrics over the past few years?
6. How strong is the company’s balance sheet?
Are the assets of the company growing over time? How much is the liability of the company? Is the company’s shareholder equity increasing? How much cash do the company have on the asset side? How much is the company’s Intangible assets, Inventories, Receivables, Payables and more? Does the company invest in its Research & Development, especially in a few sectors like Technology, Pharmaceutical etc?
7. Was the management involved in past fraud or scams?
Was the company’s promoters or management involved in any past scam? Does the company has any history of cheating the shareholders or any past penalty by SEBI?
8. Who are the key competitors?
Who are the direct and indirect competitors of the company? What is the market share of the company vs the competitors in the industry? What this company is doing differently compared to its competitors? Are there any global competitors or the possibility of global leaders entering the same market anytime soon?
9. How much debt the company has?
How much short-term and long-term debt the company has? Does the company generate enough profits or Free cash flow to cover the debt in the upcoming years? Have the promoters pledged any of their shares?
10. How is the stock valued?
What is the true intrinsic value of the company? Is the company currently over-valued, under-valued or decently valued? Is the company relatively undervalued compared to the competitors and industry? What is the calculated intrinsic value by different valuation method? How much is the margin of safety? Will you be overpaying if you buy the stock right now?
Although getting a recommendation or investing where friend/colleague suggested may land you into a few profitable deals. But if you want to make consistent returns from the market (and not just being lucky), you need to build your own trustable investing strategy.
It’s true that picking a winning stock required a tremendous amount of research. However, having an investment checklist of questions to ask before investing in stock significantly reduce the chances of investing in fundamentally weak stocks. Moreover, you can easily eliminate over 90% of the companies who don’t meet your checklist.
I hope the questions discussed in this post is helpful to you. If I missed any additional important to ask before purchasing stock in this investment checklist, feel free to mention below in the comment box.
Hi, I am Kritesh, an NSE Certified Equity Fundamental Analyst and an electrical engineer (NIT Warangal) by qualification. I have a passion for stocks and have spent my last 4+ years learning, investing and educating people about stock market investing. And so, I am delighted to share my learnings with you. #HappyInvesting
You might have heard the phrase ‘Cash is the king’.
A cash-rich business means that the company has enough cash left after paying all its expenses and debts. For the company with high cash, it simply means more liquidity and opportunities for the business.
However, very high cash is also not good for a company as it means that the company is leaving potential investment opportunities. Overall, low cash can affect business stability and high cash can reduce its efficiency.
And therefore, it is really crucial to understand the cash position of business before investing. In this post, we are going to discuss how to evaluate the cash-rich businesses to understand whether the company has low, sufficient or excess cash.
Cash and cash equivalents
When it comes to evaluating the cash position of a company, the investors look into the cash and cash equivalents (CCE) section of the balance sheet.
These are the company’s assets that are cash or can be converted into cash fast. Here, cash equivalents can be defined as the assets that can be converted into cash within 3 months like Money market funds, Short-term Government bonds, Treasury bills, Marketable securities etc.
All cash and cash equivalents are recorded in current assets segment of the balance sheet and are the most liquid asset of a company. Now, let’s understand the two common scenarios with respect to the cash level of a business.
Case 1: Low cash
When a business has low cash, it can be little worrisome for the company as it may have or will face some problems to pay short-term obligations.
In case of sufficient cash, companies can easily settle short-term debts (obligations), make an in-time purchase of new inventories/equipment, buy into lucrative investments/new technology, grab mergers and acquisition opportunities, increase dividends etc.
However, lack of adequate cash may push the company towards potential short-term problems. As a thumb rule, avoid investing in companies with low cash balance.
Case 2: High Cash
Although high cash helps a company in staying out of trouble of short-term obligations, supporting regular business operations in tough times, funding in its growth, superior performance etc. However, many times, excess cash be a little unfavorable.
Too much cash in company’s balance sheet simply means that the company is leaving potential investment opportunities to invest in the growth of its business operations or investments in other higher return instruments.
As Warren Buffett used to say- “Cash is the king. But it’s not much help if the king just sits there and does nothing.”
Too much cash reflects the inefficiency of the management to utilize it properly.
How to evaluate the cash of a business?
The cash position of a company can be evaluated using cash to current assets ratio. This ratio reflects the percentage of the total assets by cash and cash equivalents
Cash to current assets ratio = (Cash and cash equivalents)/(Current assets)
Although ideal cash and cash equivalents depend highly on the industry, however, as a thumb rule, cash to assets ratio of more than 40% can be considered to be excessive cash for the company.
Now, let us calculate the cash to current assets ratio of Hindustan Unilever (HUL) from its balance sheet.
From the above statement, you can find the cash and cash equivalents (CCE) and total current assets of HUL over the years. For the year ending March 2018, the cash to current assets ratio turns out to be equal to 5.57%, which can be considered decent. (Quick note: You need to check this ratio over the past few years and compare with the competitors to better understand the cash position of HUL).
Although having high cash is good for businesses, but it is equally important to understand the source of that cash i.e. where that cash is coming from?
There are different ways for a company to pile up cash. Apart from the profitability of the business operations, a few other ways to build cash is by taking debt or selling its assets. And both of the later two ways to generate cash is not favorable for a company as a high debt means greater interest obligations. Further, selling the assets to pile up cash may affect the future profitability of the company.
Therefore, you should always check the source of cash for the cash-rich businesses. You can find out this by looking at the cash-flow statement of a company.
In the cash flow statement, check the cash from operating activities. If this is consistently increasing, it’s a positive sign and means that the company is able to generate profits from its core businesses operations. Further, also check the cash from investing activities to find out purchase or sale of assets. Finally, also look into the debt obligations of the company for the long-term and find out its trend over years.
Note: If you are new to the financial world and want to learn how to effectively read the financial statements of companies, feel free to check out this awesome online course on Introduction to Financial Statements & Ratio Analysis.
Bottom line
The cash of a business can be roughly evaluated by navigating the cash and cash equivalent section in the company’s balance sheet. Here, cash to current assets ratio is used to check the cash level of a company.
A company should have sufficient cash to effectively run its short-term operations. However, huge cash can also be little troublesome for a company as it reflects the management’s inefficiency to use the cash productively.
That’s all. I hope this post is useful to you. Happy Investing!!
Hi, I am Kritesh, an NSE Certified Equity Fundamental Analyst and an electrical engineer (NIT Warangal) by qualification. I have a passion for stocks and have spent my last 4+ years learning, investing and educating people about stock market investing. And so, I am delighted to share my learnings with you. #HappyInvesting
Have you ever bought a cheap stock, which later got cheaper and cheaper? If yes, then you might already have met with- Value traps.
Value traps are those stocks which may seem like a value stock because of their cheap valuation. However, in actual, they are garbage stocks. Unlike value stocks, these value traps do not have true potential to give good returns to their investors and that’s why their price keeps on declining for a continued period of time.
Why do investors fall in value trap?
There are some stocks which may appear cheap because they are trading at a low valuation metrics such as PE, price to book value ratio, cash flow ratio etc.
The bargain hunters keep an eagle eye on these stocks as they appear cheaper compared to their historical valuation or relative to the market.
These investors buy these stocks at a low price considering them as a value stock. However, the problem arises when the price keeps on dropping for an extended duration of time.
Here, instead of purchasing a value stock, the investor has fallen for a value trap.
The value traps are those stocks which are ‘not’ cheap because the market has not realized their true potential or because of some temporary setbacks. These stocks are trading at a cheap valuation because the company has either lost its fire or else its fire is fading away.
A value trap is that stock which is not able to generate any significant profit growth or revenue. A few of the general reasons for the underperformance may be rising production/operational cost, declining market share, lack of new product/services, change in competitive dynamics or inefficient management.
The investors who buy such stocks just by evaluating its low valuation (without giving any regard to the reason why the valuation is low) falls in the value trap.
The real value stocks are those stocks which are trading below their intrinsic value. The reason for their cheap valuation may be either temporary factors or because the market has not yet realized their true potential.
Few common characteristics of value stocks are consistency, strategic advantage, strong business plan, growing cash flow and high-quality financials. Further, these stocks can be considered value stocks only if they are bought at a significant margin of safety by the value investors.
On the other hand, value traps are those stocks that are trading at a low valuation because of long-term or permanent setbacks (factors).
These stocks are not actually trading below their intrinsic factor. They are just trading at a low valuation compared to their historical valuation or relative to the market (which might be even above its true intrinsic value).
Value trap stocks lack catalysts or momentum to retrace its original growth track.
Although these value trap stocks might be trading at a low valuation compared to its past valuation or market, however, the chances of these stocks bouncing back to their historical valuation are quite low.
Most of the value trap stocks suffer from lack of innovation, degrading competitive advantages, high debt, low-interest coverage potential, poor management, declining profitability and no future growth prospects. Proper research is required while investing in these cheap stocks to understand the reason behind their low valuation.
For example- if the average PE of an industry is 18x and stock is trading at 5x, then considering the PE valuation, it might look like a value stock. However, whether its actually a value stock or a value trap can only be found after proper investigation.
Similarly, if a banking company is trading at a price to book value of 4x compared to the industry average of 9x, then again the bargain hunters first need to investigate the reason behind the low valuation of that stock before concluding it as a value stock.
Here are a few common signs that the cheap stock is actually a ‘Value Trap’:
1. Declining earnings:
If the earnings and cash flow of a company are consistently declining for past few couples of years, then the stock might be a value trap. The low valuations of these stocks are because of their dull future prospects. The market works on future expectations and if investors cannot see any future growth potential in the company, then the stock might even degrade further, no matter how low is the valuation.
2. Business plan:
A company with outdated technology or a non-profitable business cannot be a value stock. Take the examples of the 2G/3G technology based telecommunication companies. Most of such companies ran out of business just because of outdated technology.
3. Poor Management:
A poor and inefficient management of a company is a sure sign of a value trap. If the management lacks the driving force and their strategic vision is cloudy, then the investors of that company might suffer from value traps.
4. High Debt:
Huge debt and leverages are never favorable for a business. A big debt is an actual trigger for the most deadly value traps.
5. No change in management compensation structures:
If the earnings have declined and still the management keeps on giving huge bonuses to their top management structures, then definitely they have not adapted to address the problem. During declined earnings or troubled times, a company needs to change their fundamental behavior in order to get back in the race.
6. Poor financials and accounting principles:
The financial accounts should be clear and transparent enough to give the true snap regarding the company. If the accounting of a company is not credible, they might be hiding some financial difficulty or even solvency.
7. No change in capital allocation method:
With the shift in the scenarios, the company needs to change its capital allocation method like how much capital they want to allocate in their growth, dividends, capital expenditure or to get rid of a big debt.
8. Strategic disadvantages:
Declining market share, declining competitive advantage, and company not being able to contain its costs are again a few big signs of a value trap.
9. No growth catalysts:
When the company starts moving in the wrong direction, it might need some kind of catalysts to move back to the growth track. These catalysts can be new innovations, products/services or even earning growth. If the company is lacking any sign of growth catalyst, then again that cheap stock might be a value trap.
Although, there can be a number of other signs that a company is a value trap, however, these nine are the top signs.
Quick Note: New to stocks? Want to learn how to select good stocks for long-term investment? Check out this amazing online course: HOW TO PICK WINNING PICKS? Enroll now and start your investing journey today.
Summary:
The actual goal of a value investor is to avoid value traps. Therefore, my first suggestion to every value investor would be to research the stock properly before investing.
However, even seasoned investors sometimes fall into the value trap and buy garbage stocks considering them undervalued.
In such a situation, the best you can do is to understand the problem and cut off the stock as soon as possible. Do not purchase more stocks in order to average down or hold the stock long enough with an expectation to break even. The faster you can get rid of that stock, the better it is for you.
In the end, let me tell you the law of holes: “If you find yourself in a hole, stop digging”.
Hi, I am Kritesh, an NSE Certified Equity Fundamental Analyst and an electrical engineer (NIT Warangal) by qualification. I have a passion for stocks and have spent my last 4+ years learning, investing and educating people about stock market investing. And so, I am delighted to share my learnings with you. #HappyInvesting
Everyone who enters the stock market wants to make money from their investments. And in order to do that, first, they need to understand how people really make money from stocks. Basically, there are two ways to make money from the stock market – Capital appreciation and making money from dividends.
When it comes to capital appreciation, most of the people know this method to make money from stocks. Buy low and sell high. Purchase a good stock at a low valuation and wait until the price goes up. The difference in the purchase and selling price is the profit (capital appreciation).
This is the core principle of value investing. Find an amazing stock at a cheap valuation and hold it for a long time until the market realizes its true/real value.
However, there is also a second method to make money from the stock market which is (generally) ignored by most newbie investors. It is called dividends. In this post, we are going to discuss how to make money from dividends -the right way.
Important terms to learn regarding dividends:
Before we dig deeper, first you need to learn few important terms regarding dividends-
Dividends: Dividends are the profits that a company shares with its shareholders as decided by the board of directors.
Dividend yield: Dividend yield is the ratio of annual dividend per share divided by the price per share. The formula for dividend yield is given below:
Dividend yield = (Dividend per share/ price per share)
For example, if a company gives an annual dividend of Rs 10 and its current market price is Rs 200, the dividend yield of the company will be 10/200 = 5%.
Here are the annual dividends of a few famous companies in India (2017).
Hdfc bank – Rs 11 per share
Coal India – rs 19.90 per share
Hindustan Unilever – Rs 17.00 per share
Reliance Industries- Rs 11 Per share
Ongc- Rs 6.05 per share
Now, if you calculate the dividend yield given by the above companies, you may find it very small.
If a company gives a dividend yield of 2% per year, it’s really difficult to build a livelihood using this income, right? For example, if you want an annual income of Rs 2 lakhs in dividends, then you have to invest Rs 1 Crore in that stock. This is not feasible for most of the average Indian investors.
However, there’s an important lesson that you need to learn here—
Dividends increase over time…
This means that a good fundamentally strong company will increase its dividends with time.
For example, if a healthy company gives a dividend of Rs 10 this year and makes more profit in upcoming years, then it will increase its dividends in future.
Another important lesson to learn here is that– your dividends are going to increase. But your purchase price is going to remain constant throughout your holding time frame.
Therefore, if you look at the dividend yield, the numerator (dividends) is going to increase with time. But the denominator (purchase price of the stock) is going to remain constant for you. In short, the dividend yield for that stock is going to increase in future.
Let us understand this better with the help of an example.
How To Make Money From Dividends?
Suppose you purchased 100 stocks of a company at Rs 200. The annual dividend for that year was Rs 10. So, for the first year, the dividend yield will be 5%. This yield is small here compared to the returns from most of the debt investments.
Nevertheless, let us assume that the company is fundamentally healthy and going to give a consistent (increasing) dividends in the upcoming years. Here is a table describing the annual dividends in the upcoming years.
Dividend
Purchase Price
Dividend Yield
Total Annual Dividends
YEAR1
Rs 10
Rs 200
5%
Rs 1,000
YEAR2
Rs 12
Rs 200
6%
Rs 1,200
YEAR3
Rs 15
Rs 200
7.5%
Rs 1,500
YEAR4
Rs 18
Rs 200
9%
Rs 1,800
YEAR5
Rs 21
Rs 200
10.5%
Rs 2,100
Moreover, along with the dividends, your capital will also appreciate in value as you are holding the stock for a long time. In the next 5 years, maybe the purchase price of Rs 200 has now appreciated to Rs 400, 500 or whatever high price.
For the investors, who buy that stock directly in the fifth year (at an appreciated price- let’s say Rs 500), the dividend yield for them might be low. However, as you have purchased that stock long ago at a decent price, the dividend yield will be quite high (even higher than the fixed deposits). From the above table, you can notice the increase in the dividend yield as the dividend increases.
In short, here dividends are allowing you to receive a healthy income without selling your original assets.
Also read: New to stocks? Confused where to begin? Here’s an amazing online course for beginners: ‘HOW TO PICK WINNING STOCKS?‘ This course is currently available at a discount.
A few points of concerns regarding dividends:
The biggest point of concern regarding dividend stocks is that dividends are not obligations. This means that the company may reduce or discontinue the dividends in future.
For example, if a company suffers a heavy loss in a year or if the company is planning to invest its profit in some new project/plant, then it might reduce the dividends or do not give any dividends to its shareholders.
Therefore, if you are investing in any dividend stock, then first make sure to look at the dividend history of that company. A consistently increasing dividend for the last 10-12 years can be considered a healthy sign.
Buy low and sell high is not the only way to make money from the stocks. There are many long-term investors who are generating big wealth through their annual dividends. If you want a good consistent return on your stocks without selling it, then investing in a healthy dividend stock can be a good strategy.
That’s for this post on how to make money from dividends. I hope it was helpful to you. Have a great day and happy investing.
Hi, I am Kritesh, an NSE Certified Equity Fundamental Analyst and an electrical engineer (NIT Warangal) by qualification. I have a passion for stocks and have spent my last 4+ years learning, investing and educating people about stock market investing. And so, I am delighted to share my learnings with you. #HappyInvesting
Zerodha is the biggest discount broker in India and perfect for traders & investors looking for low brokerage and reliable trading platform.
Zerodha offers a zero brokerage for delivery equity & direct mutual fund investments. For all intraday, F&O, currency, and commodity trades across NSE, BSE, MCX, it offers a brokerage of Flat ₹20 irrespective of the trading volume. Therefore, you can save a lot of brokerage charges on your trades using Zerodha as your broker.
In this Zerodha review, we will discuss the brokerage charges, account opening charges, maintenance charges, trading platforms, products, my personal experience of using Zerodha & more. Here are the contents that we’ll cover in this post:
Table of Content
Introduction
Zerodha Brokerage Charges
Zerodha Account Opening Charges & AMC
Zerodha Products & Features
Pros and cons of Zerodha Discount broker
My experience of using Zerodha
How to open your trading & demat account with Zerodha?
Closing Thoughts
By the end of this post, you’ll have a complete understanding of Zerodha trading services and whether this broker is right for you or not. Let’s get started.
Zerodha Review –Brokerage, Trading Platform & More
1. Introduction
There are two types of stock brokers in India. Full-Service brokers and Discount brokers. The full-service brokers offer a trading platform along with advisory. However, their brokerage charges are high. A few major full-service brokers in India are HDFC Securities, ICICI Direct, Motilal Oswal, etc.
On the other hand, discount brokers offer trading platforms with minimum brokerage charges. Nonetheless, they do not provide advisory services. The biggest advantage of a discount broker is that it saves a lot of brokerages for the traders/investors. On all other prospects, like performance, computerized trading systems etc- both offer similar facilities.
An important point to know here is that all the brokers- Full service or discount brokers are licensed and regulated in India by regulating bodies like SEBI.
Zerodha is a leading discount broker in India in terms of daily trading volume, growth and customer base. It is one of the most technologically advanced and cheap stockbrokers. Zerodha has over +1 million clients and contributes to over 10% of daily retail trading volumes across NSE, BSE, MCX.
Ironically, the term ‘Zerodha’ is derived from the fusion of an English and Sanskrit word. ‘Zero’+’Rodha’ where ‘Rodha’ means barrier. Overall, Zerodha means ‘Zero Barrier’.
It was started by Nitin Kamath, an Engineer by qualification, in 2010. Nithin bootstrapped and founded Zerodha in 2010 to overcome the hurdles he faced during his decade long stint as a trader. He was named one of the “Top 10 Businessmen to Watch Out for in 2016 in India” by The Economic Times for pioneering and scaling discount broking in India. Here are a few of the famous awards won by Zerodha recently:
— National Stock Exchange (NSE) “Retail brokerage of the year 2018”
— Outlook Money “Retail broker of the year 2017”
— Ernst & Young “Entrepreneur of the year (Startup) 2017”
2. Zerodha Brokerage Charges
Zerodha offers trading services to buy and sell stocks, futures & options in equities, commodities, and currency segment. Here are the Zerodha brokerage charges:
– Free equity delivery
All your equity delivery investments (NSE, BSE), absolutely free — ₹0 brokerage.
– ₹20 intraday equity and F&O trades
₹20 or 0.01% (whichever is lower) per executed order on intraday trades across equity, currency, and commodity trades across NSE, BSE, and MCX.
If you want to trade in both equity and commodity, then you need to pay an account opening charge of Rs 300+Rs 200 = Rs 500. Anyways, if you are just interested in trading in stocks i.e. equities, you can open demat and trading for equity account at Rs 300. The demat account annual maintenance (AMC) charge is Rs 300 per year.
4. Zerodha Products & Features
Zerodha has built its own trading applications for the customers. It offers different trading terminals, websites, and mobile apps (Android/iOS) which are free for the customers.
— Kite 3.0
Kite 3.0 is a modern technology-based trading platform with streaming market data, advanced charts, an elegant UI, and more. It is a minimalistic, intuitive, responsive, light, yet powerful web and mobile trading application offered by Zerodha. Kite provides Bandwidth consumption of fewer than 0.5 Kbps for a full market watch, extensive charting with over 100 indicators and 6 chart types, advanced order types like Brackets and cover, millisecond order placements, and more.
Overall, Kite provides an excellent experience to the users through its groundbreaking innovations presented with hassle-free usability.
— Kite mobile
This is a mobile version of KITE for a seamless experience for mobile-users and available in both Android and iOS devices.
— Coin
Zerodha Coin is a platform that lets you buy mutual funds online directly from asset management companies. This platform is absolutely free since August 24, 2018. Here, you can make your investments without any commissions.
With the help of Zerodha Coin, you can have Direct mutual funds in DEMAT form, with the convenience of one portfolio across equity, MF, currency, etc. Moreover, it also provides a Single capital gain statement, P&L visualizations, and more. This Coin by Zerodha has made investments through SIPs really simple and flexible.
Other Partner Products
Apart from the above products, Zerodha also offers a few other partner programs:
Smallcase: This thematic investment platform is powered by Kite Connect APIs. Smallcase helps users to invest in different themes by intelligently providing weighted baskets of stocks in each theme.
Sensibull: This is an options trading platform which offers simplified options trading for new investors by providing powerful trading tools. Sensibull aims to make options trading safe, accessible, and most importantly, profitable for all.
Besides, Zerodha has also started a few educational initiatives to improve financial literacy and increase the participation of the common people in the financial world. Here are a few other products offered by Zerodha
Zerodha Varsity: An educational platform to educate people about investing and trading. Zerodha Varsity offers free modules on Technical analysis, fundamental analysis, futures, options, risk management, trading psychology & more. Recently, Zerodha Varsity also launched its Varsity mobile app.
Trading Q&A: An online forum powered by Zerodha to answer people’s most troublesome investing and trading questions.
5. Pros and cons of Zerodha Discount broker
Here are a few advantages and disadvantages of using Zerodha trading platforms:
No minimum balance required to open Zerodha trading account
Cons:
3-in-1 account (Saving+Demat+Trading) not available.
Online IPO investment not available.
Note: Zerodha has recently started offering Zerodha IDFC FIRST Bank 3-in-1 account. However, to open a 3in1 account at Zerodha, you need to have an existing account with IDFC FIRST Bank. Accounts can only be opened online. Read more here.
6. My experience of using Zerodha
It’s been around three years since I’m using Zerodha and I’m satisfied with the trading services provided by Zerodha.
Initially, I started with ICICI direct as my broker, but later I switched to Zerodha when I realized that I was paying way too much brokerages for my trading transactions. I wished I had switched to discount broker earlier as it could have saved me a lot of ‘unnecessary’ brokerages and trading experience is almost similar. Although I still hold both the accounts, I rarely use ICICI direct account to buy stocks now, but rather use Zerodha for making my stock investments.
7. How to open your trading & demat account with Zerodha?
Opening a demat and trading account with Zerodha is really fast and hassle-free. In fact, if you’ve all the documents, you can open your account and start trading within an hour.
Here are the documents required to open a demat and trading account at Zerodha: PAN CARD, Aadhar Card, 2 Passport size photos, Canceled cheque/ Saving bank account passbook. I will recommend keeping photocopies of all these documents ready before you apply for opening the accounts.
To open your trading & demat account at Zerodha, go to Zerodha website and click on ‘OPEN AN ACCOUNT’. Here is the link.
In the past decade, Zerodha has earned trust and respect among the trading population by providing reliable and technologically advanced trading services. It is definitely the largest discount broker in India. If you are looking to open your brokerage account with a reputable brand which offers low brokerages, and have a fast trading platform, Zerodha is definitely one of the best options.
That’s all for this post. I hope this Zerodha review is useful to you. If you have any additional query regarding Zerodha or if you want to share your review of Zerodha, you can post it in our forum. I’ll be happy to answer your questions. Have a great day!
Hi, I am Kritesh, an NSE Certified Equity Fundamental Analyst and an electrical engineer (NIT Warangal) by qualification. I have a passion for stocks and have spent my last 4+ years learning, investing and educating people about stock market investing. And so, I am delighted to share my learnings with you. #HappyInvesting
The finance industry in India has been growing at a very fast pace since last two decades. And along with the growth in the industry, there’s also a boom in job opportunities and enthusiasts willing to work in this field.
Although there are many job opportunities available in the stock market, however, one of the most frequently asked questions is- “Can a student from non-finance degree get a job on Dalal street?” How much relevant is having a finance, commerce or business degree to land a job in the world on the stock market.
Well, the short answer to this question is that you do not need a finance or business degree to get all the jobs in the stock market. A lot of financial companies hire employees from Engineering, mathematics, science, computing or economics background. In the era of internet technology, most of the financial giants are looking more for the skills and the aptitude of the candidates rather than just the degree.
Anyways, there are still a few careers in the market like Investment Banking, Equity Research, Risk Management, Investment Management, etc where a special skill set and expert knowledge of finance is required and having a degree can give an advantage to the candidates.
Nonetheless, having or not having a finance/commerce/business degree is just the starting point. There are a lot more things that you need to know if you want to build a career in the stock market industry which we are going to discuss in this post.
It’s always beneficial to have a background in Finance
When you have a background in finance, business, accounting or commerce, you already have got a minor exposure to the investing world. You might already know the lingo and familiar with the frequently used terms in the stock market like dividends, assets, liabilities, etc.
On the other hand, most of the non-finance guys are not even familiar with the most common terms of the market. Moreover, they find reading and understanding financial statements is quite challenging compared to people with a finance background.
Getting a job at Dalal Street Market
In a scenario where you are appearing in a job interview for a financial position, knowing these financial terms can help you impress the interviewer or at least not feeling like a dumb one. Besides, as stated, in a few financial positions, the interviewers create a barrier by shortlisting only candidates with a graduate degree in finance, commerce, business or accounting. And in all these cases, having a degree can be advantageous for you.
Moreover, if you want to become a SEBI registered investment advisor or research analyst, you will require an educational qualification of graduate or post-graduate degree in finance/accounting/commerce, etc. If you don’t meet the educational qualification, you cannot become a SEBI registered advisors/analyst and hence can’t have a career in the advisory field.
Overall, if you’re planning to become an investment advisor/research analysis, you’ll require a degree in these fields. Nonetheless, you can always enroll in post-graduate degrees of one or two years to get the degree and meet the educational qualifications.
When it comes to trading & investing or managing your own portfolio, you don’t require any degree.
Anyone can open their trading accounts and start trading in stocks. Many engineers, math/science major, arts graduate or even people who don’t have any degree have been investing successfully and made a huge fortune from the market. A lot of successful stock market traders/investors do not have any background in finance or never did any course in this field. One of the best examples is Charlie Munger, a successful stock investor and vice-chairman of Berkshire Hathaway.
In short, if you are not interested in a 9-to-5 job or career in the Dalal street and just want to trade in stocks on your own, you won’t require any degree or certification. Here you can make money by using your knowledge and skill sets.
What to do when you don’t have a degree in Finance/Commerce?
It’s often said that Self-Education is the best form of learning. Even though if you do not have a degree in finance, you can learn the skills and impress the interviewer with your enthusiasm to master the market.
Start by learning the lingo. It’s really important to know financial terms if you want to break the initial barrier of entering the stock market world. Know the most frequently used investing terms and how to read the financial statements.
Further, if possible, take a few online courses to learn the trading/investing concept. Attend local investing workshops, seminars, etc. It would be best if you can find a mentor. Expand your knowledge base and try simulating platforms to trade in stocks without risking your money. And finally, try to land an internship in the finance company so that you can have a real experience of how things work in this industry.
Closing Thoughts
Most people believe that a career in stock market is only for the people with finance or business background. But this is not true. Do not stop yourself from entering the exciting world of the stock market just because you do not have a finance degree. Here, having a skill set is more important compared to a degree. Moreover, even if you do not have a graduation degree in Finance/Commerce, you can go for reputed financial certifications like CFA, FRM, PRM etc that will put you on the same position as those with degrees.
My final advise will be to focus on enhancing your skills and acquiring specialized knowledge. This will help you more in building your dream life than chasing over degrees.
Hi, I am Kritesh, an NSE Certified Equity Fundamental Analyst and an electrical engineer (NIT Warangal) by qualification. I have a passion for stocks and have spent my last 4+ years learning, investing and educating people about stock market investing. And so, I am delighted to share my learnings with you. #HappyInvesting
If you want to make a significant amount of money from the stock market, it is crucial to develop a healthy stock investor mindset. However, the problem is that most people never learn this skill set as neither it is taught in schools nor colleges. Even the best degrees in finance or MBA do not honestly explain how to invest in stocks and make money from it smartly.
Only a minority population is fortunate enough is born in the family of the investors or whose close ones have been investing efficiently in stocks or mutual funds. For the rest, they always have to start from the ground zero level, without any proper guidance or mentorship.
Therefore, when it comes to developing a successful stock investor mindset, it is the responsibility of the individual to learn this skill-set themselves. If you are one of those who has never invested in the stock market and struggling to build an investor mindset, this post can be useful to you.
In this article, we are going to discuss how a beginner can develop a successful stock investor mindset.
Stock market gives us all an amazing opportunity…
There are thousands of companies publicly listed in stock exchanges. And hence, the stock market allows everyday investors like us to buy the shares of those company and get a piece of ownership.
From big Indian companies like Tata, Reliance, Wipro, ITC, etc. to Global giants like Apple, Google, Facebook, Samsung, etc. You can invest in any public company that you like through a stock exchange. All these companies are professionally managed and give employment to hundreds of people. And by investing in these companies through the market, you can become a part-owner and shareholder.
The first step of building a successful stock investor mindset is by appreciating the fact that we are given a fantastic opportunity as an investor. And if you are not investing in stocks, you are missing an excellent opportunity to become one of the owners of the best of best companies and also be a part of the growing economy.
The majority of the investing population never appreciate this fact, and hence they end up just trading stocks entire day and never owning the stock of an amazing company that they believe in.
How to develop a stock investor mindset?
My first advice for you to develop a stock investor mindset would be to read books.
However, this is a bit of obvious advice, right? And you are not reading this post for getting an obvious answer. Therefore, I won’t write an article of 1,000 words on the best investing books to read today. Anyways, if you are interested in reading a few good investing books, you can check out this list of 10 must-read books for stock investors.
My second advice would start watching investing videos on Youtube. This is again a piece of obvious advice. However, a great benefit of watching videos on Youtube (which people forget) is that they’re FREE. And therefore, I thought to mention this point in this post.
Now that we have discussed the apparent answers, let’s move forward to a few fun and easy tips to help you build an investor mindset.
Here are a few essential tips to help you build a stock investor mindset:
1. Keep investing apps on your phone:
Now and then during your day, you get some time off your work. Maybe during lunch, coffee break or while traveling to and fro from your work through metro or cab. You can use this time to develop your investor mindset.
Keep a few good investing and news app in your phone to remain updated with the investing world. A few useful apps that I recommend to stay updated with the market for beginners will be Moneycontrol or Economic times market. A quick tip- do not fill your phone will dozens of stock market app as it will burn you out to check them all. Instead, have one or two good apps which you can get comfortable with.
Joining active online forums will keep you in the loop regarding what’s happening in the market and what other’s are saying. Needless to mention that you should never invest based on a post in these forums/groups without researching. However, there are a lot of genuine contributors to these forums who are willing to share their knowledge and findings with the group members.
A lot of people envy online courses and want to learn to invest for free. But if you can spend lakhs of rupees in college tuition fee, thousands of rupees in buying books, then why not also spend some money for enrolling in investing courses that can help you get financial literacy.
How is spending money for enrolling in courses different from spending money on buying books? Both give you the knowledge, right? One of the vital step to enhance your stock investor mindset is by enrolling in a few right courses to learn the investing skills.
4. Mastermind
Although joining forums/WhatsApp groups etc. will help you in masterminding. However, it is equally important to surround yourself with people interested in similar activities as of you. This will encourage and help you keep motivated towards your goal. Find a few people with whom you can hang out and discuss your investment queries.
5. Attend local investing workshops/Conferences
If you are living in a big city, the chances are that you can easily find a few good investing workshops/conferences happening in your locality. Just by doing a simple google search, you can find a list of such events. On the other hand, if you live in a tier-2 or 3 cities, then you might have to plan a visit to your nearest big city to attend such conferences.
Attending investing workshops and conferences is another fantastic way to learn new skills, keep yourself surrounded by like-minded people and ask your most troubling questions with the experts. And if you can regularly attend a few investing workshops/conferences in a year, it will help you build a winning investor mindset.
Closing Thoughts:
No matter how common a skill might look like cooking, driving or swimming, it takes time and practice to become an expert in that skill. Just think about how many swimming lessons you took before diving in the 8-ft deep water.
Similarly, you cannot develop an excellent investor mindset in a day or week. You need to put time and efforts. Moreover, consistency is key here. Always remember, he who wants the most wins. If you’re going to become a successful investor, be consistent and keep learning.
That’s all for this post. I hope it is useful for you. Cheers!
Hi, I am Kritesh, an NSE Certified Equity Fundamental Analyst and an electrical engineer (NIT Warangal) by qualification. I have a passion for stocks and have spent my last 4+ years learning, investing and educating people about stock market investing. And so, I am delighted to share my learnings with you. #HappyInvesting
Making money from stocks is simple if you strictly follow the do’s and don’ts of stock market investing. However, because of the lack of financial education, the majority of the investing population do what they are not supposed to ‘do’ in the market and vice-versa.
For example, the first and foremost rule to invest intelligently in stocks is to ‘not speculate’, but invest only after proper research. However, most people speculate in stocks and bet that the share price will go high in the upcoming days without any significant analysis.
In this post, we are going to discuss the do’s and don’t of stock market investing for beginners. Let’s get started.
21 Do’s and Don’ts of Stock Market Investing for beginners.
Do’s of Stock Market Investing
Here are a few of the do’s of stock market investing that every investor should follow:
1. Get an education
This is probably the most relevant do’s of stock market investing. If you really want to become a successful stock investor, start learning the market.
It doesn’t mean that you should enroll in a college program/degree. Self-education is the best way to learn. There are tons of free information available on the internet which you access to learn the market. Moreover, if you want to get a head-start, you can also enroll in a few good online stock market investing courses. Let the learning begin.
2. Start small
If you are just starting to learn how to swim, you won’t jump in 8 ft deep water, right? Similarly, when beginning to start investing in the stock market, start small. Invest the lowest possible amount and gradually increase your investments as you get more knowledge and confidence.
3. Get started early
I cannot emphasize enough on the importance of getting started soon with your finances. Time is in your favor when you start investing early. Moreover, here you get enough time to recover even if you make some losses during the early time of your investment journey.
One of the key reason why people do not make money from stocks is that they do not put the initial efforts before investing in the share. Every investor needs to research the company before investing. Here you need to learn the company’s fundamentals, financial statements, ratios, management and more. If you do not want to regret later, research the company first before investing.
Stock market gives an immense opportunity to invest in your favorite companies and make money. However, there are always a few risks involved in the market, and no returns are guaranteed. Moreover, many times a bad (or bear market) may even last for years. Therefore, you should only invest the surplus money which does not affect your lifestyle even if you can’t get it out.
6. Have an investment goal
It’s easier to plan your investments (and to monitor your progress) if you have an investment goal/plan. Your goal may be to build a corpus of Rs 10 Crores in the next ten years or to build a retirement fund. Having a goal will keep you motivated and on track.
7. Build a stock portfolio
For making good consistent money from the stock market, just having two or three stocks is not enough. You need to build a winning stock portfolio of 8–12 stocks which can give you reliable returns.
Although it’s very less likely that you can find all the fantastic stocks to invest at once. However, year-after-year you can keep adding/removing stocks to build a strong portfolio which can help you reach your goals.
8. Average out:
It’s challenging to time the market and almost impossible to buy the stock at the exact bottom and sell them at the highest point. If you’ve done it, you might be lucky. A better approach here is to Buy/Sell in ‘steps’ (unless you find an amazing opportunity which the market offer sometimes).
9. Diversify
“Do not put all your eggs in one basket!”. The risk involved while investing in just one stock is way higher compared to a portfolio of ten stocks. Even if one or two of your stock starts performing poorly in later scenario, it may not affect the entire portfolio too much. Your stock portfolio should be sufficiently diversified.
10. Invest for the long-term
It’s a common fact that all the veterans of the stock market who made an incredible fortune from stocks are long term investors. But why do long-term investing helps to build wealth? Because of the power of compounding, the eighth wonder of the world. If you want to build massive wealth from the market, invest for the long-term.
11. Hold the winners, cut the losers
Cut you losing stocks if they underperform for a long time and hold your winning stocks longer to allow them to offer even better returns. This is the golden mantra of investing that you should strictly follow. Moreover, keeping your winners and cutting losers will also help in building your dream portfolio.
Most people get excited and enter the stock market when the market is doing well, and the indexes are touching new highs. However, if you only invest in a bull market and exit when the market is down i.e. when stocks are selling at discount, you will never find fantastic opportunities to pick cheap stocks.
Do not invest in the market just for a year. If you want to make good money from stocks, invest consistently and periodically increase your investment amount.
13. Have Patience
Most stocks take at least 1–2 years to give good returns to the investors. Moreover, the performances get better when you give more time. Have patience while investing in the share market and do not sell your stocks too soon for short term gratification.
Don’ts of Stock Market Investing:
14. Don’t take investing as gambling
Let me repeat this in simple words- “INVESTING IS NOT GAMBLING!”. Do not buy any random stock and expect it to give you two times return in a month.
15. Don’t invest blindly on free tips/recommendations
The moment you open your trading account, you’ll start getting free messages on your phone with BUY/SELL calls. But remember, there is no FREE lunch in this world. Why would anyone send a stranger free tips for multi-bagger stocks? Never invest blindly on free tips or recommendation that you receive, no matter how appealing they may sound.
16. Don’t have unrealistic expectations:
Yes, many lucky guys in the market have made 400–500% return on their single investment. However, the truth is that these kinds of news get quickly circulated (and inflated).
Have a realistic expectation while investing in stocks. A return between 12–18% in a year is considered good in the market. Moreover, when you compound this return over multiple years, you will get way higher returns compared to 3.5% interest on your saving account.
Further, do not assume that you can get the same profits as others, who might be investing in stocks from many past years and may have acquired an amazing skill set. You can also get similar returns, but only after enough knowledge and practice.
17. Don’t over trade
When you are trading frequently, you are repeatedly paying for the brokerage and other charges. Don’t buy/sell the stocks too often. Take confident decisions and make transactions only when necessary.
18. Don’t follow the herd
Your colleague purchased a stock and made 67% returns from it within a year. Now, he’s boasting about it, and many of your office-mates are buying that stock. What would you do next? Should you buy the stock? Wrong!
No investor can get significant success from the market by following the herd. Do your own research, rather than following the crowd.
19. Avoid psychological biases/traps
There are a lot of physiological biases while investing that can adversely affect your investment decisions and your ability to make effective choices. For example- Confirmation Bias, Anchoring bias, Buyer’s Remorse, Superiority trap, etc.
Most of these biases are pre-programmed in human nature, and hence it might be a little difficult to notice them by the individuals. Anyways, knowing these biases can help you to avoid them causing any serious damage. Moreover, a good thing regarding these biases is that — like any habit, you can change or get over them by practice and efforts.
Investing all your money in a hot stock/industry to get a little higher return is never a wise move. Safeguarding your money is equally important than getting high returns. You should never take unnecessary risks while investing in stocks and your ‘risk-reward’ should always be balanced.
21. Don’t make emotional decisions
The human mind is very complex, and there are many factors both internal and external that can affect the choices we make. While investing in the stock market, do not take emotional decisions. No matter how much you like a company, if it is not profitable and doesn’t have a bright future potential, it may not be the right investment decision. Do not get emotional while making your investment decisions.
Bottom line:
In this post, I tried to cover the do’s and don’ts of stock market investing for beginners. However, this is just a guide and not a manual. You will learn more do’s and don’t through your personal experiences when you start investing on your own.
I hope this article is useful to you. Have a great day and happy investing!
Hi, I am Kritesh, an NSE Certified Equity Fundamental Analyst and an electrical engineer (NIT Warangal) by qualification. I have a passion for stocks and have spent my last 4+ years learning, investing and educating people about stock market investing. And so, I am delighted to share my learnings with you. #HappyInvesting
“Wide diversification is only required when investors do not understand what they are doing.” — Warren Buffett on Diversification
If you read any investing book or listen to a popular investment advisor, the first tip that most of them will give you is to diversify your portfolio. “Do not put all your eggs in one basket!!”
At first glance, this tip sounds logical. After all, risks involved while investing in just one stock is way higher compared to if you diversify your investments in ten stocks. However, the problem occurs when people over diversify their portfolio.
Over-diversification is a common mistake among the investing population. In this post, we are going to discuss what exactly is over-diversification and how over-diversification can be dangerous for your stock portfolio. Let’s get started.
What is diversification?
A diversified portfolio is investing in different stocks from dissimilar industries/sectors in order to reduce overall investment risk and to avoid any damage to the portfolio by the poor performance of a single stock.
Ideally, a retail investor should hold stocks between 3 to 20 from different industries and sectors. However, personally, I believe 8–12 stocks are sufficient for a diversified portfolio. It’s crucial that your portfolio is sufficiently balanced as ‘over’ and ‘under’ diversification are both dangerous for the investors:
Under diversified portfolio has more risk as the poor performance of a single stock can have an adverse effect on the entire portfolio.
On the other hand, over-diversified portfolio gives low returns and even the good performance of a few stocks will lead to a minimum positive impact on the portfolio.
Ironically, Peter Lynch described it as ‘diworsification’ highlighting inefficient diversification, in his best-selling book ‘One up on the Wall Street’.
Why do people over diversify?
Over diversifying simply means owning an excessive number of stocks in your portfolio. If you are a retail investor and holding 30–40 stocks or more, you are over-diversifying your portfolio. Now, the next question is why do people over diversify their portfolio.
The most common answer can be that a lot of investors do not even know that they are over-diversifying. They just keep buying stocks following the famous traditional tip written in popular books i.e. diversify to reduce risk. They believe that having more stocks is good for their portfolio.
A similar thing happened to me during my rookie days. At one time, I had 27 stocks in my portfolio. Out of them, I had invested almost equally in among 18 stocks and the rest 9 were trailing stocks which contributed only a minor portion of my portfolio.
Although the returns from many of my holding stocks were high, however, the overall return on my portfolio was not that big during that period. Anyways, after a few months, when I analyzed my portfolio to understand why this was happening, I found the answer. I over-diversified my portfolio. In the upcoming months, I slowly reduced the number of my holding stocks from 27 to 14, keeping only the best ones which I was confident about.
Quick Note: An amazing book that helped me to understand that the concept of over-diversification is flawed was reading ‘The Dhandho Investor’ by Mohnish Pabrai.
The principle that I liked the most in this book was ‘Few bets, big bets, and infrequent bets’. Here, Mohnish Pabrai suggests that you do not need to make frequent bets. Every once in a while, you’ll encounter overwhelming odds in your favor. In such times, act decisively and place a large bet. If you haven’t read ‘The Dhandho Investor’ yet, I would highly recommend you to read this book.
Security
Another big reason why people over-diversify their portfolio is to have ‘security’. Buying a large number of stocks helps in spreading investment risks over many instruments.
If you diversify your portfolio with multiple stocks, you’re less likely to experience major drops. This is because the possibility of all the stocks underperforming at a particular time is quite less. When some of your stocks are having tough times, others may be out-performing. Hence, efficient diversification helps is maintaining consistent overall portfolio performance.
For defensive investors, security may be a reason for over-diversifying. It definitely reduces the risk, but it also decreases the expected returns. High returns on your best stocks will be always balanced out with the majority of average/losing stocks.
Why over-diversification can hurt your stock portfolio?
By now, you might have vaguely understood the concept of over-diversification, let’s discuss why over-diversification can hurt your stock portfolio.
Low expected Returns
Over diversifying or adding too many stocks to your portfolio reduces the risk, but it also reduces the expected returns. Let’s understand it better with the help of two extreme situations.
When you own 2 stocks, your portfolio is associated with high risk and high expected gains. On the other hand, when you own 100 stocks, your portfolio risk is low, but your expected gain is also lower.
Over-diversification is a point where the loss of expected return is higher than the benefit of reduced risks. For a well-diversified portfolio, you need to find the sweet spot where you neither own too many stocks nor too few.
Tracking them all is difficult
In order to efficiently monitor your invested stocks, you need to evaluate their quarterly reports, annual reports, corporate announcements, latest news related to the companies, etc. If you are holding 30 stocks in your portfolio, monitoring them all can be really difficult, especially for the retail investors who have a full-time day job.
On the other hand, if you are holding just 10 stocks in your portfolio, monitoring them doesn’t take too much time or efforts. However, when the number of holding stocks increases, the chances of missing important news/announcement related to your invested stocks gets higher.
Duplication or inefficient diversification
Diversification means owning different companies from different industries or sectors. For example, one stock from automobile sector, two stock from technology industry, one stock from pharmaceutical, two from banking, two from energy sector, etc.
However, if you’ve bought 5 banking stocks out of 10 stocks in your portfolio, you haven’t diversified your portfolio effectively. Over-diversification often leads to owning similar companies in your portfolio.
Closing Thoughts
The majority of the investing population are given flawed tip to immensely diversify their stock portfolio. However, following this strategy is quite dangerous for retail investors. Your portfolio should be sufficiently diversified, not ‘over’ or ‘under’ diversified.
That’s all for this post. I hope it was useful for you. Happy Investing!
Hi, I am Kritesh, an NSE Certified Equity Fundamental Analyst and an electrical engineer (NIT Warangal) by qualification. I have a passion for stocks and have spent my last 4+ years learning, investing and educating people about stock market investing. And so, I am delighted to share my learnings with you. #HappyInvesting
Desmond Tutu once wisely said, “there is only one way to eat an elephant: a bite at a time.”
In other words, what he meant to say was that even an enormous goal can be achieved if you take a little step at a time. Bit by bit, bite by bite, you’ll make possible what at first seemed impossible. Most people fail to achieve a massive goal because they try to eat the whole elephant at once.
Your financial goals are similar to eating an elephant. And in order to reach those goals, you need to take one step at a time!
Goal Setting:
The biggest factor for turning your dreams into reality is goal setting. No matter how big the goal, if you can set it, put a timer and start working on it, you can achieve the goal eventually.
Personally, I’ve two goals for the next five years. First, to turn my venture ‘Trade Brains’ into a massive online education platform which can provide financial literacy to thousands of investing population. And my second goal is to write a book. My long-term financial goal is to achieve FIRE- Financial freedom and retire early as soon as possible.
For those who know me, you might have watched me working on this blog ‘Trade Brains’ for over two and a half years now. I always knew that the path is not easy. But bit by bit, I’ve been adding investing lessons which can be useful for the beginners as well as matured investors. Similarly, for my long term goal of financial independence and early retirement, I have been working hard and investing consistently.
My investment strategy is simple. I do not try to get huge returns for a year or two by investing aggressively. I prefer consistent decent returns because I know that the power of compounding is in my favor. Time is the biggest friend for those who start investing early.
Now, why I’m telling you all this?
Similar to my goals, you might also have a gigantic dream of eating an elephant. Maybe you aim to build a huge retirement corpus or to buy your dream house on a beach across western ghats in India or to become a successful investor. And if you want to achieve these goals, you also need to take one step at a time.
If you want to learn how to invest intelligently and become victorious in investing, take your first step. Buy your first investing book and read it. Then read the second book and continue the process. You certainly won’t become an expert investor in a year or two. But with time, practice, and efforts, you will get better than 99% of the investing population.
In a similar way, if you want to build a huge corpus, let’s say for your retirement, you definitely cannot build this huge corpus by a few profitable investments. You need to be consistent in your investment strategy.
I receive a lot of emails from people asking for recommendations of hot stocks that can give them huge returns in the next six months or a year. But setting small goals and investing for six months won’t help in achieving a massive goal. Maybe you’ll win and get good returns on that stock. But this one-time return won’t make you any richer. You’ll probably remain at a similar financial situation compared to where you were last year. For achieving your financial goals, you need a reliable strategy that can give you consistent returns year after year, not just one-time big return by fluke.
It doesn’t matter how big your first few bites are, you cannot eat an elephant with a few big bites. Similarly, no matter how big the returns are, you cannot build your dream corpus in a year or two. Consistent returns are the steps to achieve your goals.
A few other tips to help you eat that elephant
Now that you have understood how to eat an elephant, here are a few other tips that can help you further:
— Set SMART Goals: Setting a smart goal is the first step towards achieving your massive goal. Often, SMART goal is described as (S)pecific, (M)easurable, (A)uthentic, (R)elevant and (T)ime bound
— Start breaking into small pieces: Even the biggest of the objects can be broken down into small atoms. Once you have set your goal, start breaking it down into small pieces. For example, if you are building a retirement corpus, find out how much you’ll need to invest yearly, monthly or even weekly to reach your goal in the desired time frame.
— Stick to the plan: “A goal properly set is halfway reached.” However, the next half is to stick with the goal– which is the toughest. If you are planning to build a corpus of Rs 10 crores in the next 30 years by investing in mutual funds, stick to your investment strategy. Do not stop your SIPs in between because of small-term market corrections.
— Celebrate small wins: Periodically measure how close you are to your goal and each time you reach a milestone, celebrate it. Achieving a massive goal will take time, and enjoying the small wins will keep you motivated to take your next bite.
— Mastermind: Probably the most important but often ignored tip. Keep close to people who encourage you and from whom you can learn. Surround yourself with people having similar goals as that of yours.
Closing Thoughts
The biggest mistake that people commit while chasing a massive goal is taking huge bites initially and try to eat the whole elephant at once. This eventually leads them to burn out too soon. Nonetheless, any big, enormous goal can be achieved by breaking it into small pieces and taking small steps.
Before we end this post, here is the final tip. Enjoy the journey. It’s gonna take time to achieve a huge goal. And enjoying is really crucial if you want to keep going.
Hi, I am Kritesh, an NSE Certified Equity Fundamental Analyst and an electrical engineer (NIT Warangal) by qualification. I have a passion for stocks and have spent my last 4+ years learning, investing and educating people about stock market investing. And so, I am delighted to share my learnings with you. #HappyInvesting
One of the most popular ways to generate income from stocks is dividend investing. Here, the investors enjoy the benefits of dividend income along with capital appreciation.
Anyways, if you are new to dividend investing, let me give you a brief introduction.
Dividends are basically a portion of income that a company distributes to its shareholders. Dividend investing means investing in those stocks which give high consistent dividends to their investors.
For example, in the last financial year (Mar 2018), HPCL gave a dividend of Rs 17 per share to its shareholders (Dividend yield=3.8%). Therefore, if you were holding 100 shares of HPCL company in your portfolio 2018, you would have received Rs 1700, credited directly into your bank account without selling even a stock.
A lot of equity investors invests in stocks just for the dividends. Dividend investing is a good way to earn secondary income along with enjoying the capital appreciation for your invested stocks. When invested correctly, investors can earn amazing income through dividends. (Also read: How to make money from dividends- the right way?)
In this post, we are going to discuss the pros and cons of dividend investing that you should know before making your investment in dividend stocks.
Pros of investing in Dividend Stocks:
Let’s start with the pros. Here are a few best advantages of investing in dividend stocks:
1. Passive Income:
This is probably the biggest advantage of investing in dividend stocks. You can treat dividends as a passive income- which means getting paid without doing any work. For the people looking for a few alternate secondary sources of income, dividend investing is the answer.
Anyways, for making passive income through dividend investing, initially, you need to put big efforts to find good dividend stocks. However, once the work is done, you can enjoy the passive income for multiple years.
2. Double Profits:
If your invested stock goes up by 30% in the next 3 years, and you received a dividend yield of 3% per year from the same stock, the combined profits are way higher than just the capital appreciation. Here you can earn double profits compared to investing in companies that don’t give any dividends.
3. Hedge against bad markets:
Everyone makes money in a rising market. However, the scenario is different when the market turns sour.
In the bear market or corrections, the share price of a lot of your favorite stocks may fall. And hence you might not be able to make a good return from capital appreciation of stocks. However, if you have picked right dividend stocks in your portfolio, you can enjoy a decent dividend income even when your portfolio is down.
Further, dividend stocks are generally big matured companies and hence are less influenced by a bear or speculative market. Investing in these companies can provide a good hedge to your investment from a bad market. In addition, dividend investing also helps in capital preservation. Even if the stock price of your invested company doesn’t go up, if you are getting regular high dividends, you will be able to preserve your capital.
4. Steady Income:
Profits from stocks are only on ‘paper’ unless you sell them. This money is not in your bank account. The profits/loss are unrealized until the final settlement i.e. selling the stock. However, dividend stocks add steady income in your pockets without worrying about selling any stock.
5. Dividend Reinvestment:
You can use the dividends that you receive from stocks to buy more stocks and reap the benefits of dividend reinvestment. Else, you can use that money to invest in any alternative investment options like Bonds, gold etc if you want to diversify your portfolio. Once you get the money back in your account, you have immense options to re-invest them back in whichever investment option that suits you.
6. Long-term investment:
One of the best strategies to make money from stocks is the same old philosophy of ‘buy and hold’. However, while investing for the long term, there may be a number of situations where the investors may be in the need of a few extra bucks. Here, selling stocks may be the only option available to them if they want to make money from their invested stocks.
Nevertheless, as dividend stocks offer a steady income stream, investors may prefer to hold the stocks longer and enjoy the benefits of long-term investing.
Cons of investing in dividend stocks:
No investment strategy is perfect and the same goes with dividend investing. Here are a few biggest disadvantages of investing in dividend stocks:
1. Low-growth companies
Most growth companies do not give dividends to their shareholders as they reinvest their profits in expanding their businesses like opening new plants, entering new cities, buying new machinery, acquiring small companies, etc.
On the other hand, big matured companies do not have so many opportunities and hence they offer a large profit to their shareholders. While investing in dividend stocks, the investors may be investing in low growth companies which may not always offer high returns.
2. High dividend payout risks
High dividend payout means that the company is distributing a major portion of their profits to their shareholders. For example, if a company made a profit of Rs 100 crores in a financial year and shares Rs 85 Crores as dividends, this means that the dividend payout ratio is 85%.
At first glance, it may sound favorable for the shareholders. After all, they are getting a major portion of the profit as dividends. However, in the long run, it may not be advantageous for investors.
Think of it from the other angle. When the company is not retaining enough profit for itself, it doesn’t have any big money left for reinvesting in its growth. And if the company is not reinvesting enough, it may face problem to grow, compete with the rival companies or even to retain the same net profit in upcoming years. Moreover, if the company doesn’t grow or increase its profits, it can’t add more value or increase dividends for the shareholders in the future.
3. Double Taxation
Companies pay Dividend distribution tax (DDT) of 15% to provide dividends to their shareholders. However, once dividends are credited to the shareholders, the investors again have to pay a tax on the capital gain. Although, small investors do not have to pay any tax on dividends. However, if the dividend received is more than Rs 10 lakhs, the investor has to pay a tax of 10% on the capital gain by dividends.
This is the worst case scenario. Dividends are not obligations and a company may decide to cut the dividends anytime in the future. Moreover, when the company cuts the dividends, even the share price falls significantly as the public sees it as a negative sign. And that’s why the dividend investors may face double side trouble.
Further, many times, the board of directors can also change the dividend policy of a company. This can again have an adverse effect on the dividend investors if the decision is made against the existing dividend policy.
Quick Note: New to investing? Check out this awesome investing course for beginners: HOW TO PICK WINNING STOCKS? Enroll today and start your journey in the exciting world of the stock market.
When you should exit a dividend stock?
Now, that you have understood the pros and cons of dividend investing, the next big question is when should you exit a dividend stock. If you’ve invested in dividend stocks, look for the following signs periodically to avoid any dividend pitfall in your invested company. Here are the three signals that you should exit a dividend stock:
— Dividends start declining: A fall in dividend for a year compared to the previous one can be ignored by the investors as businesses can always have a few losses in some years. However, if the dividends start continuously declining year-after-year, it may be a sign for the investors to exit.
— High dividend payout: A payout ratio greater than 70% for the continuous years may be a warning sign that the company is not retaining enough profit for its growth.
— An adverse change in dividend payout policy: If the company changes its dividend policy against the favor of the investors, then again it may be a sign to exit that stock.
Closing Thoughts:
Traditionally, dividend investing approach was used by the retirees or the people entering their retirement age. As these people do not have any primary source of income (regular paycheck) after retirement, receiving small dividends per year in their account can be a good secondary source of income.
However, these days even the young and middle-aged investors are looking forward to dividend investing. Why? Because it is always a joy to see dividends get credited to your account periodically. Moreover, they do act as a secondary income source.
That’s all for this post. I hope it was helpful to you. Happy Investing.
Hi, I am Kritesh, an NSE Certified Equity Fundamental Analyst and an electrical engineer (NIT Warangal) by qualification. I have a passion for stocks and have spent my last 4+ years learning, investing and educating people about stock market investing. And so, I am delighted to share my learnings with you. #HappyInvesting
10 Best Dividend Stocks in India (Updated: May 2019)–
“Do you know the only thing that gives me pleasure? It’s to see my dividends coming in.” – John D Rockefeller
Whenever a retail investor, like you and me, buys a stock, then their main aim is to earn money through their investment. There are two methods by which anyone can earn money by investing in stocks. They are:
Capital Appreciation
Dividends
The first one, capital appreciation, is quite famous among investors. Everyone knows this secret to earn in the stock market. Buy low and sell high. The difference is capital appreciation or profit.
Suppose you bought a stock at Rs 100 and two years hence, the price of the stock has increased to Rs 240. Here, the capital appreciation is Rs 240- Rs 100 = Rs 140. In short, you made a profit of Rs 140 or 140%.
Almost everyone who enters the market knows this method of earning by stocks. It can also be concluded that most people enter the market hoping that their investment will be doubled or quadrupled and will make them a millionaire one day through capital appreciation.
Now, let us move to the second method of earning through stocks- DIVIDENDS.
Whenever a company is for profit, it can use this profit amount in different ways. First, it can use the profit amount in its expansion like acquiring a new property, starting a new venture/project, etc. Second, it can distribute the profit among its owners and shareholders. Third and final, it can distribute some portion of the profit to the shareholders and use the remaining in carrying out its expansion work.
This amount distributed among the shareholders is called DIVIDEND.
What is a dividend?
“A dividend is a distribution of a portion of a company’s earnings, decided by the board of directors, to a class of its shareholders. Dividends can be issued as cash payments, as shares of stock, or other property.”
Typically, most companies give dividends two times a year, namely– Interim dividend and final dividend. However, this is not a hard and fast rule. Few companies, like MRF, gives dividends three times a year.
Suppose you are a long-term investor. You have invested in the stocks of a company for 15-20 years. Now, if the company does not give any dividends, there is no way for you to make money until you sell the stocks.
On the other hand, if the company gives a regular dividend, say 4% a year, then you can plan your expenses accordingly.
A regular dividend is a sign of a healthy company.
A company, which has given a consistent (moreover growing) dividend for an interval of over 10 consecutive years, can be considered a financially strong company. On the contrary, the companies that give irregular dividends (or skips dividends in harsh economic conditions) can not be considered as a financially sound company.
If you want to learn stocks from scratch, I will highly recommend you to read this book: ONE UP ON THE WALL STREET by Peter Lynch- best selling book for stock market beginners.
Big dividend yield can be an incredibly attractive feature of stock for the people planning for retirement.
Now that we have understood the meaning of dividends, let us learn a few of the important financial terms that are frequently used while talking about dividends.
Must know financial terms regarding Dividends
1. Dividend yield: It is the portion of the company earnings decided by the company to distribute to the shareholders. A stock’s dividend yield is calculated as the company’s annual cash dividend per share divided by the current price of the stock and is expressed in annual percentage. It can be distributed quarterly or annually basis and they can issue in the form of cash or stocks.
Dividend Yield = (Dividend per Share) / (Price per Share)*100
For Example, If the share price of a company is Rs 100 and it is giving a dividend of Rs 10, then the dividend yield will be 10%. It totally depends on the investor whether he wants to invest in a high or low dividend yielding company.
2. Dividend %:This is the ratio of the dividend given by the company to the face value of the share.
3. Payout ratio: It is the proportion of earnings paid out as dividends to shareholders, typically expressed as a percentage. The Payout Ratio is calculated as follows:
Payout Ratio = Dividends per Share (DPS) / Earnings per Share (EPS)
As a thumb rule, avoid investing in companies with very high dividend payout ratio. In other words, be cautionary if the payout ratio is greater than 70%. (Also read: The Fundamentals of Stock Market- Must Know Terms)
To move further now that we have understood the basics behind the dividends, here is the list of 10 Best Dividend Stocks in India.
10 Best Dividend Stocks in India-
In addition, if you are interested to know about other high dividend stocks, then you can find it here: BSE TOP DIVIDEND STOCKS
The growing companies give less dividend yield to their shareholders as they use the profit amount in their expansion.
On the other hand, the Blue Chip stocks, which are large and established company and has already reached a saturation point, gives good regular dividends. Further, the public sector companies are known for giving good dividends. Industries like Oil and petroleum companies, in general, give decent dividends.
Here are few of such stocks with high current dividend yields which are also worth investing:
That’s all. I hope this post about ‘10 Best Dividend Stocks in India That Will Make Your Portfolio Rich’ is useful to the readers. Further, I will highly recommend not investing in stocks based on just high dividend yield.
Hi, I am Kritesh, an NSE Certified Equity Fundamental Analyst and an electrical engineer (NIT Warangal) by qualification. I have a passion for stocks and have spent my last 4+ years learning, investing and educating people about stock market investing. And so, I am delighted to share my learnings with you. #HappyInvesting
While evaluating a company to invest, one of the biggest element to check is its debt level. Ideally, it is said to look for a company with Zero-debt as it means that the company is able to manage its finances predominantly through internally generated cash without any external obligations.
However, is debt always bad for a company? Should you ignore a stock just because it has some debt. Moreover, what if the debt level increases after you invest in a stock? Should you exit that company because the company is adding debts?
In this post, we are going to answer these questions and discuss whether debt is always bad for a company or NOT. Let’s get started.
How a company finances its debt?
A company can raise debt either by issuing debt securities like bonds, notes, corporate papers etc or by simply borrowing money as loans from banks or any lending institutions. However, once the company has taken a debt, it is legally obliged to pay it back based on the terms agreed by the lenders and lendee.
In general, if a company is currently debt free and later starts taking some debt, it might be good for the business as the company can invest that money in expanding its business. However, the problem arises when the company which already has a big debt in its balance sheet, decides to add more. This increasing debt level can negatively affect the shareholders as by norms, debts are to be paid first by the company and shareholders will always be the last in line to receive profits.
When debt is not bad for business?
Although a few matrices like declining profit margins or negative cash flow from operating activities for a consistently long period is considered as a bad sign for a business. However, the same is not true in the case of debts. The debt is not always bad for business.
If a company has a low debt level and decides to take a new debt to start a project which may double or quadruple their revenue, this debt may be good for the business and add more value to the investors in the long run. However, an important question to ask here is whether the company can afford the debt at that point in time. If yes, then it may not be a point of concern for the company or you as a shareholder.
To check whether the company can repay the debt or not, you can look at the free cash flow (FCF) of the company. As a rule of thumb, if the company’s long-term debt is less than three times the average FCF, it means that the company will able to repay its debt within three years using its free cash flow. Of the other hand, consistently negative free cash flow with increasing debt level can be a warning sign for the investors.
Quick note: Also check out this post by Harvard business review on When Is Debt Good?
Debt is cheaper than equity
For growing a business, the management may decide to raise money from investors (equity funding) or they may borrow money from banks as debts. However, an important concept to understand here is that debt is cheaper than equity.
In other words, equity is a comparatively expensive method of financing for a company. Why? Because, first of all, raising money by equity dilutes the ownership and control of the promoters. Second, the cost of equity is not finite. Here, the investors may be expecting bigger returns as they are taking higher risks.
On the other hand, the cost of debt is finite and they are sourced at lower rates. This is because the debt is less risky financing as the firm is obligated to pay it back (unlike equity funding where the company is not obliged to pay any dividends to the shareholders). Moreover, the company has no obligation to the lenders once the debt is paid off.
Further, debt financing doesn’t result in any dilution and change in control. Here, the lenders take no part in the equity of the company and hence the promoters and shareholders can enjoy the benefits.
How to evaluate the debt of a company?
Although checking the liability side of a balance sheet is always the first step to evaluate the debt of a company. However, there are a few financial ratios that you can use to evaluate the debt level. Here are the three most frequently used financial ratios to evaluate the debt of a company:
1. Current Ratio:
This ratio tells you the ability of a company to pay its short-term liabilities with short-term assets. Current ratio can be calculated as: Current ratio = (Current assets / current liabilities)
While investing, companies with a current ratio greater than 1 should be preferred. This means that the current assets should be greater than the current liabilities of a company.
2. Quick ratio:
This is also called the acid test ratio. Current ratio takes accounts of the assets that can pay the debt for the short term. It doesn’t consider inventory as current assets as it assumes that selling inventory will take some time and hence cannot meet the current liabilities.
Quick ratio = (Current assets — Inventory) / current liabilities
A company with a quick ratio greater that one means that it can easily meet its short-term obligations and hence quick ratio greater than 1 should be preferred while investing.
3. Debt/equity ratio:
This ratio is used to check how much capital amount is borrowed (debt) vs that of contributed by the shareholders (equity) in a company. As a thumb rule, prefer companies with debt to equity ratio less than 0.5 while investing.
Contrary to the general belief, debts are not always bad for a company but can help it to speed up the growth. Moreover, debts are a more affordable and effective method of financing a business when it needs cash to scale up. The problem arises only when the management does not control its debt level efficiently.
Hi, I am Kritesh, an NSE Certified Equity Fundamental Analyst and an electrical engineer (NIT Warangal) by qualification. I have a passion for stocks and have spent my last 4+ years learning, investing and educating people about stock market investing. And so, I am delighted to share my learnings with you. #HappyInvesting
How much should you save — This is one of the biggest questions that comes to everyone’s mind when we talk about budgeting. The importance of smart budgeting cannot be overstated as excessive spending and irregular saving habits can lead to disasters in the future.
If you want to enjoy a healthy financial life, it’s really important to have a balance between your savings and your expenses. And budgeting for individuals helps to align the spendings with savings and figuring out how much to spend on what.
If you are also struggling with personal finance, then this post may be a holy grail for you. In this post, we are going to discuss one of the easiest budgeting strategies to figure out how much should you save. And it is called the 50/20/30 Strategy.
50/20/30 Strategy
This strategy can be extremely helpful for youngsters who are just entering the world of personal finance and don’t know how to manage their spendings. Originally developed by Elizabeth Warren and Amelia Warren Tyagi, this strategy is beautifully described in their book — All Your Worth: The Ultimate Lifetime Money Plan.
50/20/30 is a really simple and straightforward budgeting strategy that can help you to define how much should you spend on your essential spendings (needs), savings and finally on your preferences (wants and choices). According to 50/20/30 strategy, you should allocate:
50% of your monthly income on ‘Needs’ (like rent, food etc)
20% of your monthly income on ‘Savings’ (like your retirement fund, investments etc)
And the remaining 30% of your monthly income on your ‘Wants’ (like traveling, dining out etc)
Now, let us understand all these three spending allocations in details.
50% of your income on Needs
As soon as you get your in-hand salary (i.e. your monthly income after deducting taxes), set aside around 50% of this income to pay for the things that are essential in your day-to-day life. The expenses in this category can be spendings on rent, food, transportation, utilities, health care, basic groceries, insurances etc.
Although allocating half of your monthly income in ‘needs’ may seem massive. However, when you look at the items in this list, it makes sense to allocate around 50% of your income on your needs.
Anyways, in case you are not able to manage your needs within 50% of your monthly income, you may have to optimize your lifestyle. For example, instead of living in a fancy house in a fancy locality which is too far from your workspace and adds transportation costs, you may wanna move in an affordable house with walkable distance to your office.
20% of your income on Savings
Once all your essentials are paid, next you need to allocate the 20% of your monthly income on savings. This category includes repayment of debt like a student loan, credit card debt etc along with investing the remaining for your future goals and retirement.
It’s really important that you allocate 20% of your income in this category before moving on to the next one i.e. spending on your ‘Wants’.
30% of your income on Wants/Personal choices
This is the last category in your personal budgeting. Once you are done with your essentials and savings, the final spendings should be on the things that you want. The expenses in this category include spendings on shopping, traveling, entertainment, dining out etc.
This list may also cover a few vague expenses like Netflix subscription, membership to clubs, weekend trips etc depending on your lifestyle. However, make sure that your spendings do not cross the allocated budget of 30% of your monthly income.
Example:
Let’s say that you make Rs 1.5 lakhs per month (in-hand income after paying taxes). As soon as you get your salary, you need to allocate
Rs 75k in meeting your day-to-day essentials like rent, food etc.
Rs 30k in paying your debts and savings.
And the remaining Rs 45k on your personal choice like dining out, traveling, memberships etc.
Using this simple budgeting strategy, you won’t run out of money to meet your daily needs, continuously contribute towards your future and retirement savings, and can also spend guilt-freely on your personal choices.
Apart from the 50/20/30 strategy, here are two other popular strategies that can also help you to figure out how much should you save.
10% rule: This rule says that you should save at least 10% of your monthly earnings, no matter what the circumstances. This strategy is brilliantly explained in the book — The Richest Man in Babylon and works well for the people who are struggling to save money. The basic ideology behind this strategy is to ‘Pay yourself first’ and keep 10% of your savings only to yourself.
100 minus your age rule: This rule tells that you should save at least the percentage of your earnings which is equal to 100 minus your age. For example, if you are 28 years old right now, then you should save (and invest) at least 100–28 = 72% of your monthly income. This rule is based on the principle that the expenses increase as you grow older (like kids, dependents etc) and hence you should save and invest more when you are young.
Although 50/20/30 budgeting strategy may seem a little difficult in the beginning, however, with discipline and persistence — it is followable. Moreover, this budgeting strategy doesn’t depend on how much you earn. Even people with moderate to low salary range can follow this strategy if they are ready to optimize their lifestyle a little.
Anyways, the last thing that I would like to add is that do not take the rule too-damn seriously. I mean, do not freak out if your essential spending crosses over 50% in a month. Sometimes, you may need to review your income and expenses and make adjustments in the budgeting strategy.
For example, if you believe that your needs are less — let’s say you already own a house and hence you don’t need to pay any rent, but your personal desires are more, then you can follow the 40/20/40 strategy {40% spending on needs, 20% spending on savings and 40% spending on wants/personal choices}.
On the other hand, if your essential expenditures are high — let’s say you pay a heavy monthly rent, but your personal wants are low, then you may prefer 60/20/20 strategy {60% spending on needs, 20% spending on savings and 20% spending on wants/personal choices}. Nonetheless, whatever strategy you prefer, try to allocate at least 20% of your monthly income in savings. Remember- ‘A Penny Saved is a Penny Earned’.
Hi, I am Kritesh, an NSE Certified Equity Fundamental Analyst and an electrical engineer (NIT Warangal) by qualification. I have a passion for stocks and have spent my last 4+ years learning, investing and educating people about stock market investing. And so, I am delighted to share my learnings with you. #HappyInvesting
