Empowering Women in 2024: A Guide to Kickstarting Direct Equity Investing for Financial Independence.

Aaradhya sat by the window reading a book. She had a notepad next to her where she was jotting points from the book titled ‘Equity investments made easy.’ Aaradhya looked up from the book towards the television, which featured the stock market channel. She heard the TV host mention the name of a stock that she had been tracking, and made a mental note to review this share. With the New Year round the corner, Aaradhya had made a resolution that she intended to adhere to with all her determination. She was going to learn about the stock markets and grow her wealth by investing in equity.

INVESTING FROM SMALL SAVINGS

Aaradhya was a homemaker who had been regularly saving small sums from the household budget. She had accumulated a tidy amount. In the past, she had regularly invested in gold jewellery and fixed deposits, but realized that this did not help her grow her wealth to the extent she desired. Her friend, Jeevika, who was a software professional, had been sharing information with Aaradhya on how she had been building her wealth by investing in equity. Jeevika had been encouraging Aaradhya to do likewise. She also explained to Aaradhya that with interest rates falling, investing in fixed deposits did not grow capital. Then, she explained the concept of real returns. Real returns are computed by reducing the inflation rate from the fixed deposit interest rate. For example, if a fixed deposit gave 5 percent interest per annum and inflation is at 6 percent, your real return is (-)1 percent (5 percent minus 6 percent). With interest income earned on fixed deposits being taxable, the real returns fall further. Negative real returns result in capital erosion. In other words, the real value of your capital reduces over time. Aaradhya realized her folly of investing in these traditional investments and decided to stay away from them from the New Year.

The New Year would provide Aaradhya a start to her journey to wealth building through equity investments. Just like Aaradhya, you too could start your equity investment journey from 2024. Here are a few pointers that you should keep in mind:

Learn the basics:

Read up on the basics of equity investing. You must understand what equity investing is, how it works, why companies list on the stock markets, the difference between debt and equity, why equity offers greater returns potential, how to select stocks (fundamentals, ratios, etc.), the risks involved and ways to lower risk, holding period, etc.

Open the necessary accounts:

Open a broking account, demat account and link them to your bank account. These accounts are necessary for your equity investments. It’s preferable to use an online broking account that is a DIY (do it yourself) type, allowing you can make your equity investments independently.

Asset allocation:

Asset allocation implies deciding how much to invest in each asset class (equity, debt, real estate, etc.), which is based on your risk profile, financial goals and liquidity needs. Based on your risk profile assessment, you can decide how much of your capital should be invested in equity.

Equity investment strategies:

There are a number of investment strategies. The two most popular are VALUE and GROWTH INVESTING.

VALUE INVESTING:

When you buy a stock below its intrinsic value, it’s termed as value investing.

PITFALLS OF VALUE INVESTING:

Stocks are usually available ‘cheap’ for good reason – the company could be in an industry with low/no growth prospects, the company’s financials may be weak, etc.
You will need to have deep understanding of the industry, the business and the company to assess whether it is a ‘value’ stock.
You will also need to have knowledge of finance to assess the intrinsic value of the company to decide whether the stock is under-priced by the market.
You cannot predict when the company will recover/start on the growth path.
There isn’t sufficient information about ‘value’ companies to help you assess the quality of the stock.
You may believe the stock price has hit rock bottom; however, it may fall further after you have invested.

GROWTH INVESTING

When you buy a stock that’s expected to grow at an above-average rate, it’s termed as growth investing.

SHORTCOMINGS OF GROWTH INVESTING:

You need to time your entry; if the stock has already moved up significantly, you may make meagre gains or incur losses.
You need to closely monitor the movement of the stock’s price so that you can correctly time your exit.
If the stock price falls, you need to judge whether the company’s growth potential has been adversely impacted or its market sentiment has turned negative, to decide whether to exit the stock or stay invested.
Most businesses are cyclical. If you enter at a time when the business cycle is heading downward, you will see a fall in the stock’s value.
Growth-oriented companies may not declare dividends so that they can reinvest the funds in their businesses. This deprives you of cash inflows.

While both these investment strategies work when there is some amount of certainty on how the stock markets are expected to move, during uncertain times, these strategies tend to become riskier.

Greater the uncertainty, greater the risk. In this situation, investors should look for safety in quality. They should focus more on quality investing instead of going ‘value’ or ‘growth.’

WHAT DOES QUALITY INVESTING MEAN?

‘QUALITY INVESTING STRATEGY’ implies investing in fundamentally strong companies that meet the following 10 parameters

Market capitalization of over ₹ 1,000 crore (Market capitalization = number of shares outstanding multiplied by market price per share).
The company should have been in existence for at least 10 years.
The company should have delivered Revenue/Sales growth of at least 10 per cent and Return on Capital Employed (ROCE) of at least 14 per cent consistently over the last 10 years.
Competent and visionary management; the company should be a frontrunner to adopting new technologies to make its business more efficient and improve its offerings to its customers.
Part of sector that is on the threshold of sustained exponential growth.
The company should successfully move through these value migration stages while maintaining its leadership. For instance, with respect to commuting, moving from cycles to cars, and now, to driverless cars.
Should be a ‘quality’ company in the B2C (Business to Consumer) market segment, which facilitates building brands, customer loyalty, expanding across geographies and products, etc. thereby increasing the company’s equity valuations.
Look for quality companies you are familiar with based on brands, quality, service, loyalty, etc. – a product or service that you use and like.
Quality companies usually offer products across the price spectrum, thereby increasing their consumer base. For instance, a company manufacturing brown goods (refrigerators, air conditioners, etc.) can offer products at different price points.
It’s best to avoid PSU stocks and cyclical companies in sectors such as commodities, Infrastructure, and capital goods, etc.

Lastly, selecting quality stocks and staying invested over the long period, through all the ups and downs that the market may experience has the potential to result in significant wealth appreciation.

Note: the 10-point criteria mentioned above is not applicable for the selection of banking stocks.

Your equity portfolio:

Your equity portfolio should not comprise of more than 15-25 stocks. Exceeding this will make monitoring your portfolio difficult.

Monitor your investments:

Read up research reports of the stocks you own, keep abreast of the quarterly results and other macro and micro developments related to your investments.

CONCLUSION

The key is to hold for the long term (10-plus years). However, regularly monitoring your investments is a must so that if there is an adverse event related to a stock that you hold, which could impact the long term prospects of the stock, you can exit in a timely manner.

Aaradhya read the last page of the book and put the book down with a look of satisfaction. She was ready to start investing in equity. She promised herself that 2024 would be a turning point in her journey towards prosperity.

About Author

Vinayak Savanur

Founder & CIO at Sukhanidhi Investment Advisors, a SEBI registered equity investment advisory firm. He has nearly a decade of experience in the stock markets and has been a holistic financial planner.