10 Factors to consider before investing in the equity market

How to invest in the equity market? 10 factors to consider before investing in the equity market.

Do you want to invest in the equity market? Have you ever lost your money in the equity market? Are you investing your money in the stock market on tips of so-called experts?

If your answer is yes to any of the questions, then this blog will be very much informative for you. It will let you know every bits & pieces to consider before equity market investing.

Now my question for you, how many times you have burnt your hands in the equity market? How many times you had lost a significant part of your saving in the equity market?

The truth is if someone tells you that he never lost money in the equity market then either he didn’t ever invest money in the equity market, or he is just a liar.

To lose money is the first lesson of the equity market that tells us to come with preparation else be prepared for losing money.

I had also lost money twelve years ago when I was a newbie in the equity market. That time I have also learned from someone that for wealth creation, take exposure to the equity market. I open my de-mat a/c with great enthusiasm & put my significant saving for buying the stocks as my broker told me.

As I knew nothing about the market, so I believed in my broker & start buying the stocks. But after six months I realized that I am not making money instead, losing.

My broker told me that sell those shares & buy others. So, I did again the same thing. After a year I lost a significant part of the invested amount. So, I discouraged & losing belief in wealth creation asset class.

I stopped to invest any more money in that. My broker was giving the tips of hot stocks which will outperform but this time I had not gone with him. I start pondering on that what went wrong & how I can win the lost battlefield.

From here I figure out what went wrong which I’ll share with you & start my wealth creation journey. No doubt I am still learning but have much more confidence than starting years.

These are the ten points that I have learned from my twelve-year journey which I am sharing with you.

#1. Know Your Behaviour: This point plays a pivotal role in equity market investing. First of all, you have to figure out what are you out of followings

1. Gambler: One who puts his/her money in the equity market without any logic, system, parameter, calculation, source of knowledge, strategy & just put money only because of tips.

2. Speculator: One who put his/her money in the equity market with the thought of, to make a profit from price fluctuation of that stock within a short span of time. He/she speculate that the price will go up or down. If making a profit then by booking profit or if losing money then by booking lose, comes out without second thought.

3. Investor: One who puts his/her money in the equity market with a proper his/her own study, system, parameters, calculation, strategy for the long term without any tip from the so-called market expert. They believe in the market & have a lot of patience. They kept insulated themselves from market fluctuations. Then market rewards them with the delightful return, it might be 2x,3x…10X… even more.

Actually, it’s the process of evolution to become a better investor from a speculator or gambler. None is an investor from the very first day, it takes time to evolve as an investor if stays in the market.

Investing in the stock market means you own the business. You do the partnership with that business. So, as an owner of the business, you will give time to grow to your business & then that business will create massive wealth for you.

But if you invested today & start rise/fall of share price from very next day then it’s speculating not investing. It means you have not done your homework very well.

#2 Stop Watching Business Channel for Investing: Many retail investors watches the business channel & act upon the advice of the so-called market experts.

There are very few people who give authentic information on the business channels like I used to watch interviews of Sir Raam Deo Agarwal, JMD & Co-Founder of Motilal Oswal.

Except for investing ideas, you can watch that according to your taste. But if you are making your decision based on their advice of so-called market expert then definitely will become the scapegoat of them.

In the beginning days, I also do like that, but when I came into the light of business behind the wall, I left at all.

There is a big game used to play behind the scene.

Some market influencer people play pump & dump games. They pump heavy amounts in penny stocks & manipulate the valuation of those stocks. When the value of that stock reaches its defined level, then trough business channels, the big news of those multi-beggar penny stocks starts to come.

The retail investor fascinated with all this news & puts his/her money at higher valuation because most have no knowledge of stock valuation.

Then these market influencers have taken out their money with great profit. The stock price of that penny stocks nosedives significantly.

Hence a retail investor trapped at a higher valuation, then neither that valuations come in the near future, nor able to get out from those stocks due to the high loss of their savings. Only waiting is the last option left with them.

#3. Watch What Is Happening Nearby: Some people used to ask whether in which stock they should invest? Which stock will give a good return?

So, my answer to all those ones is, start watching what is happening your nearby. It means that take a notepad, pen & start to write down the brands you are using in your home, companies, office, etc.

Let’s start first from our home & make a list of brands, products which we are using so frequently in our homes.

Write down their manufacturer or marketing companies’ names. Sometimes brand name & company name would be the same & sometimes be different.

If the manufacturer & marketing company name would be different. Then write down the marketing company’s name.

Let’s take the example of Bata, in this both brand & company name is the same. We use shoes, slippers of Bata Company. Let’s take another example for washing utensils, we mostly use VIM liquid wash or bar. Now write down which company making this, which is mentioned on the wrapper or sticker on it. We will notice that brand & manufacturing names both are different. Here Hindustan Unilever Limited would be mentioned as a manufacturer.

When we start to make a list of all these companies, will notice that a lot of good companies’ stocks are nearby.

Then we can make a diversified list of all these brands like Ashok Leyland, Eicher, TTK-Prestige, Pidilite, Hero Motor corps, Bajaj Finance, etc.

In a recent lockdown due to Covid-19, you would have noticed that commercial vehicles were running irrespective of other vehicles. This movement was some signals of the commercial vehicle market. Who can understand & apply those signals of any market, can create massive wealth.

Like one more example that usage of the internet for online study, work from home, etc increased hugely. This was another example of a signal of telecommunication companies & other businesses associated with them.

Our skill is, to convert that information into wisdom & apply for own benefits.

So, once we prepared that list then start collecting every information about that brand & company. You will notice that a lot of wealth-creating companies are nearby. For this, no expert advice required, just start watching what is happening nearby would suffice.

#4. Respect The Market Behaviour: Some newbie comes in the stock market but has the expectations of a fixed income market i.e. how much they will get a return after one or another year?

They even don’t know their invested money even could vanish instead of increasing if don’t understand the market behavior.

Although the stock market given good returns over time, irrespective of any other asset class. But still, we should keep in mind that there is no fixed return in the market.

The rise or fall of the stock market index is the fundamental nature of the market. These ups and downs in real terms help to create massive wealth for wise investors. This daily ups & downs of a market index, which is also called volatility helps us to enter into the market.

To understand the loss due to market fall, we first must understand the difference between the notional loss (also called temporary loss) & permanent loss. The notional loss will always there but permanent loss depends on us.

Assume if you invested Rs.1,00,000 & one fine day its value dropped to Rs.90,000/-. It’s notional loss until you book loss. It will become permanent if book the loss & taken out money from the market.

The notional loss in the market will always there as it’s the fundamental nature of the market.

We should not afraid of this, instead stay invested and get the experience of that roller coaster ride of equity market & will get a lot of real experience which could never be taken from anywhere in the world.

#5 Don’t Time The Market: The meaning of this is that we should start investing as soon as possible rather waiting for a good opportunity to come. No doubt if any opportunity comes on the way, they should take advantage of that. But we never know when that opportunity will come. We never know when the market will rise or fall.

In the recent market fall in March 2020, who knows this will happen and who knows the market will recover so soon. Normally people make their decision for investing based on the level of nifty or Sensex index rather than individual stock performance.

There huge list of stocks that outperformed against the index. No one in this world can catch the top or bottom of the stock. Instead, our focus should be, on which better valuation we could pick the stock.

#6 Do Nothing Approach: Investing is a boring activity. There is nothing to do every day with the equity market. Instead, we should choose good businesses that are like ‘Diamonds in the Dust’ and stay invested for the long term in them for 10-15 years. By this approach, we can avoid a lot of behavioral errors.

Whenever we do buy/sell stocks, we have to pay overhead charges to brokerage firm & government which reduces our profitability. The daily market ups & downs compel us to do something with our picked stocks, but we should insulate with all these fluctuations as much possible.

Do only something when some serious matter happened with that business. It may be scam by the management, profit growth, government penalty, wrong asset allocation etc.

#7 Enhance your skills: We should have some basic knowledge of the stock market if we are entering directly in the equity market i.e. doing buy/sell of stocks independently. If we don’t know what to do with the equity market, then indirect mode i.e. Mutual Funds is the best way to invest in the equity market.

Because I am reiterating that in equity market the “Return of Investment is more important than Return on Investment”

To take the informed decision, there are two analysis works in the stock market, the first one is Fundamental Analysis which tells us about ‘how much the business is healthy’ and the second one is the Technical Analysis which tells us ‘when to take entry/exit’ from the market. Both are very important analysis. If we are going without learning these two skills, then it means we are just going to play gamble, not investing.

For an investor, to learn Fundamental Analysis is sufficed for investing but if he has the knowledge of Technical Analysis along with Fundamental Analysis, then it would be the extra edge.

So should keep enhancing our skills throughout the journey of investing. Because with these skills we could make informed decisions and would have more conviction in our decisions irrespective of the market behavior. We would be able not to follow the Herd Mentality.

#8 Don’t measure the depth of the river with both feet: This is the very famous line used in the investment world. The meaning of this line is that we should keep in mind the risk associated & how to take necessary actions to protect our investment.

Assume we have Rs.1,00,000/- and put all the amount in some single stock. And unfortunately, the company of that stock bankrupted. Our whole investment could vanish.

But in another case, if we put same money in ten stocks then if some single company would get bankrupted, in that scenario our portfolio would not hamper as much as in the earlier case. This process called diversification.

So, our investment portfolio should be diversified. By doing so we are insulating our investment from market risk.

We should invest our money only in those businesses, which we understand.

#9 Invest in those businesses which have Moat:

if we goggle the meaning of moat it shows that “A deep, wide ditch surrounding a castle, fort, or town, typically filled with water and intended as a defense against the attack.

In earlier days kings used to make a moat around their fort to protect themselves from enemies. In the same way when we are going to invest in any business then it must have moat i.e. competitive advantage. It’s the most important factor before investing in any stocks.

We knew many companies were world leaders 10-15 years ago but not now. They were the part of the top 30 companies of Sensex but not now. Because they lost their competitive advantage or moat over time.

The moat of any business could be their ‘Brand’ like I-phone, ‘Distribution Network’ of HUL, ‘Network Effect’ like WhatsApp, ‘Switching Cost’ like changing the bank a/c from another bank, ‘Government Protection’ like the licence of rating agencies ICRA, CRISIL, or Explosive companies.

So, we should identify such strongest moat no matter company size & invest in them. Because it directly impacts the profitability of any business.

#10 Have De-mat A/c from good brokerage firm: Now if we are going to invest in the stock market. Then there should be de-mat a/c from reputed brokerage house in which we will keep our shares in financial asset form.

The de-mat a/c is just like our saving bank a/c but comes under SEBI regulator while saving bank a/c comes under RBI regulator. In saving bank, a/c we keep our money in that account, in the same way we keep our shares in de-mat a/c.

It’s my personal experience that we should open our de-mat a/c from those brokerage houses which takes the least brokerage. In my opinion, Zerodha is the best platform for this, whose dashboard is very understandable, has the least brokerage, and their reports of buy/sell also very simple to understand with respect to another brokerage firm. 

Conclusion: So here we discussed the 10 golden rules which I have learned from my experience. By learning from these golden rules, we can avoid huge losses from the equity market & create massive wealth. These are the pre-investing guidelines before investing in the equity market. In the equity market, “What we should don’t” is much more important than “What we should do”.

Disclaimer: This blog is for educational purpose only & used my best of knowledge till now. I will not be responsible to anyone for loss/profit of their investment directly or indirectly. Consult your financial planner if you have doubts before investing. I have taken the names of many companies in which either owns the shares of those companies or just taken for educational purposes, it’s not a recommendation.