4 SIMPLE STEPS TO INVEST IN STOCK MARKET AND EARN MONEY

Adesh Lunawat
Jun 1, 2020
3 min read

Updated: Jun 4, 2020

Are you looking to invest but don't know how to start? Or, Are you not choosing the right stocks? Don’t worry, I will help you with some critical aspects that are imperative to understand and analyse before investing fund in equities. Next time, you will surely be able to make better picks.

Remember, Investing without knowledge is gambling.

I am going to share a very powerful framework that will enhance your investing skills manifold. The framework that every serious investor follows FTSR Framework, i.e., Fundamentals, Technical, Sentiments, and Risk Management.

Fundamentals

Fundamental Analysis is a method to determine stocks intrinsic value based on quantitative and qualitative factors.

For the sake of simplicity, let’s understand it with an example of a shirt

Whenever we buy a shirt we look at its characteristics like Fit, Colour, Fabric, and Style. These all are its fundamentals. Now based on given fundamentals and prices of competitive brands we determine whether to a buy this shirt or not at a certain price. If we think the price is too high then we let it go or don’t buy.

Similarly before you buy any stock, you should evaluate its Business Model, Management(Make sure it has no history of frauds), Growth Prospects, Historical Ratios, and do comparative and valuation analysis(P/E Ratio is what retail investors can look for).

Technical Analysis

Let’s take our previous example of a shirt. It’s May and you know that price of that brand shirts fall every year in mid of June by 20%. So what will you do? Obviously, if not urgent, you will wait for a month and buy that shirt 20% cheaper.

Similarly in share prices we can find some pattern and one should wait for some corrections to buy that stock at key support levels to maximize profit.

Red colour line shows -200W Moving Average

Violet colour lines shows 50 W Moving Average

As you can clearly see ICICI Bank is in uptrend and the best time to buy it would have been every time it crossed 200W Moving Average from down to up(denoted by Blue Arrows).

Sentiments

No matter how good the company is, generally you can expect good returns when the broader market(say Sensex) is having positive sentiments and is on rise.

Let’s understand it in Covid-19 times. Except Pharma and FMCG, all other sectors were plunging. See the table below(Stocks in Engineering declined steeply)

You should always wait for reversal confirmation in sentiments, and then park your money.

Risk Management

Whenever you invest in shares be cognizant of the fact that it’s risky. All say higher the risk, higher the return. Yes, it’s right but only partially. Risk Management is something through which you can lower the risk and even earn higher returns.

Have a look at DHFL chart below

DHFL Share fell from Rs 620 to Rs 12 (-98%) in a matter of just six months from September 2019. The reason was alleged fraud by its management. Now it’s trading at just Rs 12.

If one had no any risk management in place, he could have lost 98% of his wealth in just 6 months.

I am sharing 3 fabulous ways of mitigating your risk:-

1) Portfolio Diversification:- Never put all eggs in one bucket. Don’t invest all money in one share.

2) Time Diversification:- Never park all your money at any given time. Rather invest the same in small divisions over multiple months/ quarters.

3) Stop Loss:- You should always have a stop loss placed so that you never lose your entire money. Generally you can place it below 200 Day Moving Average with some margin.

(There are several other criteria we need to look at)