The stock market, as the name suggests, is a marketplace where securities are bought and sold by investors and traders. If you’re a beginner the best shares to buy can be difficult to find without research and guidance.
Equity share is a unit of ownership in a company. In simple terms, if a company has a paid-up capital of say, Rs. 10 crores and it is divided into face value of Rs.10 each, there will be one crore shares. Consequently, the investor receives dividends (after profit-declaration) usually as a percentage of this face value. Previously authorities and companies issued shares as certificates in paper form.
In comparison, today you hold shares in electronic or “dematerialized” form like money in a virtual bank account. There are several types of companies, proprietorship, private limited, public limited, etc.
Stocks which are publicly listed and traded in stock exchanges belong to “public limited” companies. Also, a company may issue a specified number of shares to the public after necessary approval from its Board of Directors and Securities and Exchange Board of India(SEBI).
This is an IPO or Initial Public Offering and takes place through the Book Building Process.
The minimum price at which a share will be issued is the “floor price,” and the maximum price is the “cap price”. Investors can bid anywhere in this range, including both prices. Price at which the company allots shares is the cutoff price.
Once shares are allotted, they are traded on stock exchanges by asking (or bidding) for specified quantity and price. Now, if the seller is accepting the price, the trade is complete. Traders do this over the trading platform through a stockbroker in a stock exchange via the internet.
Preference shareholders get dividends before other equity shareholders. That’s the hierarch.
Furthermore, Warrant holders are eligible to receive equity shares on a specific date. You negotiate or fix the date at the time you purchase the warrant
Equity derivative is a security which contains a Lot i.e., 100 or 200 shares of a scrip (equity share, index, etc.). It is traded as a contract. A futures contract enables the holder to buy and sell from exchange on or before its expiry which is usually the last Thursday of a calendar month. An option contract gives the holder the right but not the obligation to buy or sell the underlying security. ETF or Exchange Traded Fund is very much like a share, but it may consist of several securities like bonds, indices, or commodities like gold.
You can trade most of the securities in stock exchanges online. For this, each broker provides a trading terminal to the client. The terminal will have scrip name, last traded price, open price, high price, low price, close (or previous close in a live market), traded volume, traded time, etc.
A trading terminal may also have additional features like live charting. It is possible to study technical charts during market hours (also called intraday charting). A trading terminal may also contain other information about listed companies like category, daily price range, 52 weeks high/low, etc.
Sample trading terminal:
Inside the terminal, the trader can choose the scrip, right-click, and select Buy or Sell. However, he needs to enter quantity, price, and/or stop loss if any. After you choose the market price, the trade will take place for the most recent bid price. Otherwise, it will take place once the selling price matches the buy price.
Procedure to start investing
Following entities can invest in Indian stock markets:
- Hindu Undivided Families (HUF)
- Registered Companies (Private/Public)
- Mutual Funds or Domestic Institutional Investors
- FIIs or Foreign Institutional Investors
- Central/State Governments
- Insurance Companies
- Any other entity approved by the Securities and Exchange Board of India (SEBI).
Stockbrokers act as intermediaries between investors/traders and the stock exchanges. These brokers execute trades, i.e., buy or sell on behalf of their customers/clients based on their online or telephonic instructions. Therefore, you can open a trading account with a registered broker or sub-broker in a recognized stock exchange for dealing in securities.
Also, the investor has to open a Demat account with a recognized Depository Participant (DP) for keeping securities in a dematerialized (electronic) form similar to a bank account.
Features of a trading account
Trading account will have details about cash deposits by the client along with stocks purchased/sold, charges levied by a broker like a brokerage, securities transaction tax, service tax, etc. For opening a trading account, the following forms may be provided by the broker:
- Trading Account opening form (KYC) or Know Your Customer
- Demat Account opening form
- Undertaking by the client (POA) or Power of Attorney
List of documents required for verification of identity and address are:
- PAN (Permanent Account Number)
- Proof of Identity (Aadhaar, Passport, etc.)
- Proof of Address (Passport, Bank statement, etc.)
Furthermore, the stockbroker will arrange for opening a trading account after successful completion of verification process.
Identifying scrips for investment
There are two types of analysis for identifying scrips for investment.
- Firstly, fundamental analysis focuses on the company’s business prospects, management strength, and experience, anticipated future growth, financial ratios, etc.
- Secondly, technical analysis is based on the movement of price and traded quantity (volume) over a period of time. Hence, it forecasts future price movement based known technical patterns with graphical charts.
In this article, we use fundamental analysis for the identification of best shares to buy if your are beginning your trading journey
Business prospects: Each industry has its own demand and supply; therefore, revenues are affected by this factor. For example, currently, the telecom sector is saturated, and there is fierce competition between operators, whereas the Fast Moving Consumer Goods (FMCG) industry is steady. Renewable energy industry like solar power has a bright future.
Management strength: While assessing this quality one has to understand how long they have been in the business, projects that they have successfully completed, where they have lagged behind and how they fare in relation to their competitors.
Also, their history in dealing with other clients/vendors/contractors/customers have to be studied and ensured that they have a good track record.
Future growth of a company can be assessed by its order book, plans for expansion and exploring additional areas of business ventures, etc.
Financial ratios: There are at least three financial ratios which an investor should know for understanding the company’s performance.
EPS or Earnings per Share: It reflects the earnings of the company for each outstanding share. To clarify, ‘Outstanding’ means the shares that are available for trading in the stock market at any given time. Consequently, EPS is the result of deducting promotors’ shareholding, locked in shares, etc. from a total number of shares. EPS is calculating by adding the total earnings for the previous four quarters and then dividing it by the total number of outstanding shares.
P/E (Price/Earnings) ratio: P/E ratio is another term that can tell the investor how much the market is willing to pay for the company’s earnings or market price divided by the EPS.
Book value of a company is the company’s net worth, computed by its total assets minus its total liabilities.
This indicates how much the company would have leftover in assets if it went out of business immediately. Like EPS, book value per share is arrived at after dividing the book value as per last balance sheet by the total number of outstanding shares.
Price to book value (PBV) is the ratio between stock price and book value per share.
P/E ratio and PBV can tell the investor whether a stock is “growth” stock or “value” stock. A growth stock usually is high priced and has high PE and PBV ratio, while a value stock has more potential for price appreciation. It usually will have low PE and PBV ratios.
Cash earnings per share (cash EPS), or operating cash flow, is a financial performance indicator comparing cash flow to the number of outstanding shares. However, Cash EPS differs from earnings per share (EPS), which compares net income on a per-share basis.
Few value stocks which may be of interest from a long term perspective (a year of holding or more):
All these stocks have depreciated reasonably after their listing/recent highs.
As it can be seen from above, all companies are profit-making consistently and have low P/E compared to sectoral P/E as well as low PBV suggesting that these are value stocks and there is scope for price appreciation.
Let’s look at a brief description of these companies.
Apollo Micro Systems Limited (NSE: APOLLO)
Apollo Microsystems is a Hyderabad based company which offers electronic, electro-mechanical, engineering designs, manufacturing, and supply. Furthermore, it designs, develops and sells high performance, mission and time-critical solutions to defense, space and homeland security for the ministry of defense, public sector undertakings and private sector companies. Karunakar Reddy Baddam (now Managing Director) found the company in 1997.
Major investor of this company include Sundaram Mutual Fund, Sundaram Infrastructure Advantage Fund, and Jupiter South Asia Investment Company Limited – South Asia Access Fund.
Hindustan Aeronautics Limited (NSE: HAL)
The Government of India owns Hindustan Aeronautics Limited (HAL). This aerospace and defense company is headquartered at Bengaluru. Also, it is managed by Ministry of Defence.
The company has operations across the aerospace sector. It executes the design, fabrication, and assembly of aircraft, jet engines, helicopters, and also their spare parts. It has several facilities spread across India including Nasik, Korwa, Kanpur, Koraput, Lucknow, Bengaluru, Hyderabad, and Kasaragod. Above all, it’s HF-24 Marut fighter-bomber was the first fighter aircraft made in India.
HAL’s aircraft production includes Fighters (Tejas), Agricultural, Helicopters (Dhruv, Rudra, etc.), Trainers (Kiran, Sitara, etc.), Utility (Pushpak), gliders and unmanned aerial vehicles. Furthermore, there are plans to manufacture passenger aircraft indigenously. HAL R Madhavan is its Executive Director.
More than 40% of HAL’s revenues come from international deals to manufacture aircraft engines, spare parts, and other aircraft materials.
Kesar Terminals & Infrastructure Limited (NSE: KTIL)
KTIL was incorporated on 21st January 2008 and is a wholly-owned subsidiary of Kesar Enterprises Limited (KEL). More importantly, it has over 75 years experience in diversified activities of manufacturing sugar, alcohol, production of hybrid seeds, and storage terminals.
KTIL is a bulk liquid storage and logistics company that handles different types of petroleum, petrochemical, hazardous and non-hazardous liquids. Furthermore, it has two terminals, comprising 64 tanks. It also provides Public bonded warehouses for bulk imported chemicals, storage, and export of bulk chemicals and castor oil.
Executive Director: H R Khilachand
Precision Camshafts Limited (NSE: PRECAM)
PCL, a Solapur company, manufactures camshaft castings used in the automobile industry. Its product range includes chilled cast iron camshaft, straight hollow camshaft, profiled hollow camshaft and TriLobe camshaft. It has the capacity to produce 2.2 million machined camshafts every year. Yatin Shah is the founder and Managing Director of this company.
Quick Heal Technologies Limited (NSE: QUICK HEAL)
Quick Heal Technologies Limited is an IT security solutions provider based at Pune. The company was formerly known as CAT Computer Services Private Limited and started as a computer service center in 1995. Later, it was renamed as Quick Heal Technologies Private Limited in 2007.
In 2010, Quick Heal received an investment of Rs. 60 Crores from Sequoia Capital. It opened a new branch office in Madurai, Tamil Nadu. Furthermore, in 2012, offices were opened in Japan and the US, and in 2013, offices were opened in Africa and UAE.
Quick Heal develops its own security suite, Quick Heal Total Security which uses the BitDefender scanning engine.
Kailash Sahebrao Katkar: CEO
The company develops security software for consumers, servers, cloud computing environments, and small and medium enterprises. It sells products directly to customers or through its partner channels. Its enterprise product offerings operate under the brand name Seqrite.
Disclaimer: This article discusses making investment decisions based on fundamental analysis. Financial data is obtained from stock exchanges (BSE and/or NSE), and it is only a guideline for the reader to understand how to invest in the stock market, which is a high-risk activity. Author/publisher does not accept any liability for consequences which may result from the investor’s decision.