This is the ultimate stock market strategy for 2023. you will understand a lot of concepts associated with the stock market in a very easy-to-understand language that you can go and execute. That’s the most important point, That will further help you build on the concepts that I’m teaching you today.
So let us first and foremost understand some of the key definitions associated with the stock market. So that will help you perceive the concept of the stock market better. The first word that you need to understand is the concept of the market. And what exactly the market is in very easy to understand.
When you go to a vegetable market, what are you doing?
You are buying vegetables. You are a buyer.
And who is the seller?
The seller is the vegetable vendor.
So that’s a vegetable market similar to that we have a stock market. So in stock, what happens is that buyers and sellers meet and they buy what they buy businesses. So essentially you have sellers on the one side and you have buyers on the other side. Sellers are selling businesses and buyers are buying these businesses.
For example, in India, you have a range of businesses that are called small-cap, and large-cap businesses. A prime example would be something like, let’s say Hindustan Unilever, Asian paints, Pidilite. These are fairly big companies. They are doing business and people are buying and selling these types of companies on the stock market.
Now the question will come that okay, why is it that the sellers and buyers are buying businesses and why are these businesses selling themselves in the market? So let us understand that viewpoint very quickly. So in terms of business, what do businesses need? For example, if you study the operating model of HUL or Asian paints of Pidilite, or ITC all these are major companies, what do they need?
They need money. Because if they get money, they can use that money to build new factories, hire new people, and do a bunch of good, good stuff with it. So they need money and the stock market becomes a mechanism through which they get that money.
Now is this the only Avenue for ITC or Hul to raise money?
The answer is no. They can also do bond operations so they, can launch their corporate bonds, and there they will have to go to where they will have to go to the bond market, not the stock market. So I hope this basic concept is clear as to why businesses want to list themselves in the market.
Now then why is it that sellers and buyers are so excited in terms of buying and selling these businesses?
Because these buyers or sellers get an opportunity to make profits. Because for example, if I see today that hey, ITC is trading at Rs220, if I buy it today at 220 and tomorrow if it goes up to 250, I can sell it off, and make a 30 rupee profit. Therefore I will become a buyer today and a seller tomorrow. Now Interestingly, even the government has an incentive because the government makes a lot of money in terms of taxation. They charge security, transaction tax, GST, and duniyabhar taxes. So they also make money in the stock market and the entire advance continues. Now comes the second key question that will be great. Businesses list themselves.
Where do they list it?
So that is called the National Stock Exchange or Bombay Stock Exchange in India. These are major exchanges in India. It’s like Sabzi Mandi. Again, when you are going to Rohini Sabzi Mandy or Punjabi Bagh Sabzi Mandy, or South Delhi Sabzi Monday. There are specific names associated with that subzi Monday or Vegetable Market. Similarly, when people are trading, selling buying stocks, they have to go to a stock subsequently which is called NSE or BSE. So that is the concept behind NSE BSE. Now let us very quickly understand what is meant by a stock. Now here is a classic example of TCS, now TCS. All of us would have heard of it. TCS is one of the biggest companies in India and you will see something called a market cap.
So market capitalization simply means the price of the stock X number of outstanding stocks that are there. So if you multiply these two things, it gives you the total market cap of the company. So these are some of the data points associated with a stock called TCS.
And what are you essentially buying?
Whenever you decide to invest in a business called TCS, you are buying its stock. So if there are let’s say 1000 outstanding stocks that PCs have, if you are going and purchasing one stock of PCs, then you are one by 1000 owner of PCs, which is a business.
So owning a stock, what do we mean?
It simply means that you are going and purchasing stocks and you are becoming an owner in that company to the extent you are purchasing the percentage of those outstanding stocks. This brings us to a related concept that sometimes you might have seen that some stocks are trading at 3524. So TCS is at this level. Sometimes you will see ITC trading at the 220 level, which is much more inexpensive in absolute terms compared to TCS. Sometimes you will see companies like MRF trading at 70,000 Rs per stock.
So does it mean that MRF is a bigger company or TCS is a bigger company or ITC is a bigger company? Can you identify that?
The answer is no because the size of the company is represented by market capitalization. And market capitalization is what it is. Current market price times the number of outstanding shares. It’s like me telling you that, hey, you own one 2000 rupee note and I’m on a 100, 500 rupee note. It does not make you richer because you’re holding a note, which is a higher denomination. So this is a very important concept.
Even many intermediate-level players in the stock market get beaten by this because they just assume that, hey, if the stock is trading at three rupees, it’s very inexpensive. Let’s just go and buy it. It does not matter. What matters is the percentage of ownership that you have in any company. That is the most important point. Now comes the third concept, which is around the basket of stocks. In the previous section, I showed you one specific stock, which was PCs. Now, if you imagine a briefcase and in this briefcase, you keep on putting stocks, you put TCS also. You put Reliance. You put ITC also. So you have different stocks in this briefcase. So this becomes like a collection or a basket of stocks. So different types of baskets exist in the stock market. For example, a very important basket is called a Nifty 50. Or there is another basket called Sensex.
When you read newspaper headlines that today the market fell by 500 points, what is meant by the market?
The market means that this particular basket of Nifty 50 stocks or sensitive stocks fell by 500 points. This is a fairly important basket because it represents the market, so to say. The second category of baskets that you will usually see in the stock market is called mutual funds. So these can be a large-cap, these can be the small-cap, these can be hybrid, this can be this, these can be that there is just no end to segmenting mutual funds super complex. But whenever you hear the word mutual fund, it simply means this. It’s a basket. That’s it. Now, baskets can be designed in thousand different ways. Similarly, mutual funds can also be designed in a thousand different ways. You also have something called small cases. These are theme-based investments. Again, they are baskets. Now, the important point to note from this discussion is that as a retail investor, when I say retail investor, it means small investors like you and me. We are retail investors. So we have two choices. One is that we can go and invest in these baskets in any of these baskets. Choice number two is to go and invest in individual stocks.
Now, which one is better?
It depends on what type of investor you are. But to cut the long story short, when you’re starting, you must start your stock market journey by taking more positions in the basket. And over time, you must migrate towards purchasing individual stocks.
Now, why is that?
There can be another video that can be created on the same topic. But here whenever you are transacting through a basket, you have to pay a certain type of commission. For example, if you are purchasing a mutual fund or a small case, or even passive funds like Nifty 50, you have to pay certain types of commissions. And therefore, if you want to avoid commissions, you can go and purchase in individual stocks. That is one of the prime reasons, not the only reason to migrate towards individual stock picking. So now let us understand some of the key terms associated with the stock market. These are very important. These are a little bit disjoint, but they will help you understand why certain stocks go up or down. So there are six key terms. I’ll explain it in a very quick fashion. One, you must have heard of the word operators. Now, operators are big players. They are big fat players who have a lot of money with them. They can be bulk buyers or they can be bulk sellers. Now, operators, by pouring in the money, can move the market. For example, a lot of operators, if they decide to sell their ITC stock, then the ITC stock will fall. So any major player who has a lot of money in their pockets can be termed as an operator. A more organized definition would be FIIs DIIs. Now FIIs are the foreign money that is flowing into the Indian market. They are fair-weather friends. It simply means that when everything is hunky Dory in the world, everything is good.
Good. They will come and invest their money in the emerging economies. Why?
Because emerging economies like India tend to grow faster. So from that particular perspective, FIS tends to invest a lot of money in emerging economies when the world is in a stable condition. Otherwise, they flock to what they flock to stable economies. A classic example of FIS would be Mr. Ray Dalio, Mr. Warren Buffett. They bring their money to India also, usually under good circumstances, and withdraw the money from the market when the circumstances of the world economy start turning baddies. Or domestic institutional investors, on the other hand, are organized investors from India with deep pockets. For example, these will be AMC companies, these would be insurance companies. These would be large investment houses like HDFC, AMC. So they would be pouring money into the Indian market. Since they are based out of India, they are called DII or domestic institutional investors.
Now, you must have also heard the term promoters. Now, what do promoters mean?
So promoters simply mean that people are supporting a particular company. Now, if I start my own company and if I make it big and it gets listed on the stock market, then I will be a promoter of that. That company, my stake is tied into it. And usually, promoters have a big holding in the company. Now, this is a slightly advanced concept that how to analyze the shareholding pattern of a particular company. But to cut the long story short, a promoter has a significant stake in any particular company that he or she is promoting. Now comes the concept of asset classes. Now, asset classes, you must have heard that there is an equity asset class. Asset classes simply mean how a particular asset is categorized or classified.
For example, equity or the stock market is an asset class in itself.
Similarly, you have bonds, which is an asset class in itself.
Similarly, you have cryptos, which is an asset class in itself.
Similarly, you have gold, which is an asset class that falls under commodities. Whenever you hear the word asset class or equity asset class, it simply means the stock market.
Now comes the most important point from this slide what type of players exist in the stock market?
Now, there is a range of players, but just for categorization, we need to understand the difference between traders and investors. Now, investors usually put their money for a slightly longer-term perspective. They are betting on the businesses. They are not flipping that stock. For example, if I go and buy something like Hul, and if I’m an investor today, I’m betting on Hul because I see something good in the company. I see the business to be strong and I am betting on the business. So I am an investor. I am not riding the wave. So traders usually ride the wave. They can be Intraday, they can be swing traders. And there are different categorizations of traders also. But Intraday simply means that they take a position on the same day and they cut their position on the same day. A classic example would be that, for example, if I’m a trader, I would go and buy ITC stock today with the expectation that it will go up by the end of the day and I will get to sell it off. But if I’m not able to sell it off, then I’ll take a little bit of loss and I will square off or close off my position. Similarly, swing traders have a slightly longer viewpoint.
So they would say okay, I’m buying ITC at 220 and I will sell it off at 250. How do they decide on 250?
They look at technical patterns. So usually traders go technical patterns or technical analysis and investors, on the other hand, are fundamental analysts. Now comes the next important section as to how do the stock prices move. So now let us work through an example here. You will see the current price of a stock called ITC, which is trading at Rs226. So the stock prices will keep on changing.
Now why does it go to 227 and why does it fall to 225? What is the economics behind it?
So economics can be easily understood by looking at the supply and demand curve, which is extensively used in economics. So the supply curve is upward sloping and the demand curve is downward sloping. And wherever these two points intersect, this gives you the price. And if for some reason the supply moves or shifts rightwards, the price will fall. If the demand curve is not shifting, and vice versa if the supply curve is shifting or the demand curve is shifting, wherever these two curves are intersecting, that will give us the price of the stock. So let’s assume that if the supply curve is shifting rightwards and the demand curve is not moving, then the intersection point becomes this and this becomes price. P Two Now, there is complex economics behind it, but let’s understand it through a very simple mathematical equation. And the mathematical equation is this, whenever the demand of something is greater than the supply, the prices go up. And that’s very obvious. That if you are sitting in sun on a beach and you feel like having water and there is no supply of water, but there is excessive demand because there will be ten more people like you would want to drink water on a hot, sunny beach. The prices of that mineral water that you will be sold will be high and the opposite will be the case. If the supply of something is in excess and demand is not there, then the prices will come down and the same scenario ends up playing in the job market. What if your skills are very rare, that is, the supply of skills is very limited, but the demand is very high, then your salary is going to be very high.
On the flip side, if the skill that you have, it’s very common and the demand for that skill is also not very large, then the salaries are going to suffer. So to cut the long story short, why is it that the price of a particular stock moves up or down?
Because the supply or demand moves up or down. Now, this can change for a wide range of factors. For example, sometimes news can be manipulated. For example, if the news has been spread that a promoter of a certain company is in very bad shape from a health point of view, you might get scared that who is going to manage the company. Let me just sell my stocks so that will impact the demand for the stock. Similarly, there can be more fundamental reasons at play. For example, if some company announces that it has had a very bad quarter and the same thing keeps on happening with the company over and over and over again over different quarters, then, of course, the fundamentals of the company are suffering. And then again the demand for the stock will come down and as a result, the price will also come down.
Now, sometimes external factors are at play. For example, the current Russia-Ukraine crisis is an external factor at play. It’s not as if the HDFC AMC fault is there or the fault is there. It is just that external factors are there and therefore these stocks are also falling. Even the macroeconomic environment or market cycles also impact the supply and demand of stocks. So you should not get overwhelmed. But learn to analyze two things.
One is trying to analyze the Macroeconomics what is happening in the world and also what is happening at a micro-level with the company, is the management performing well? Is the company taking the right steps? Is the company focusing on Randy? Is the company maintaining its revenues and profits?
So this is the simple piece of analysis that you must do to become a better investor. Now you might say, Akshat, you are asking us to analyze a lot of things but what is that one single data point that we must be analyzing? And what is that one single technique that we must be analyzed to become effective stock investors?
Okay, so this is what the majority of the analysts end up spending their time on. So they do something called fundamental analysis. Now the core of the fundamental analysis is you are trying to predict the present value of future cash flows. Now, this is a complex finance topic. So let me explain it in a very easy-to-understand language that for example, let’s imagine that ITC this year is going to generate 100 crores, next year it is going to generate 110 crores. And these are the expectations. The year after that, it’s 120 Crore, then 130 Crores. Now, this is year zero and this is year one. This is year two and this is year three. Right. So here we are discounting it back with a certain discount rate which is called X. Now you don’t need to get into the finance of it. You just simply need to Google the present value of future cash flow. It is just trying to present the present value of all the money that this company will be making in the future. So they are using a mathematical model. You don’t need to understand that mathematical model. But as a fundamental analyst, this is what you’re trying to predict. So you don’t need to personally do it. You can read it up what the present value of expected cash flow is and this gives you a current stock price.
Now can you do it correctly?
There is not even the most famous professor on valuation who can get this wrong. So Professor Damodar posts a lot of stuff on the valuation on his channel and he also can get that wrong he has gotten the valuations wrong multiple times because this is an approximation game. But this is the game that you are playing and this is the reason why the stock market is so difficult.
So I hope this short discussion allows you to understand that. Why is it that the stocks move all the time?
It is because at the present value of the future, cash flow estimates are changing and there is a range of news that is coming in, a range of macroeconomic changes that are coming in. And as a result, the stock price keeps on changing every single minute. Now comes the final section as to what are some of the tips and strategies that I would like to give out to retail investors who are just generally starting in the stock market. So there are a few key points that you must remember. First and foremost, the stock market in the long term keeps on going up. The reason it is fairly simple the world grows.
Why does the world grow?
Because the businesses are growing.
Why are the businesses growing?
Because they are becoming more productive.
Why are they becoming more productive?
Because they are making more and more money. Therefore, they are becoming more and more productive. They are becoming more and more productive and profitable. They are plowing back the money and making more money. In the process, firms are making more money then automatically their stock prices will go up. If the world is not growing and if the businesses in the world are not growing, then the world will shrink, economies will shrink and the stock market will also shrink. But since the world grows, businesses grow. Therefore, the stock market also keeps on growing. So this is the first key point that you must remember.
Number two, you need to understand that as a retail investor, you might have a day job, you might be working from nine to five. You might be doing a range of things so you can’t become traders in the market because you have to track short-term movement. Also in the majority of the cases, if you are a trader, an additional point is that the majority of the traders lose money. Almost 90% 95% of the traders. Therefore, retail investors should focus on becoming investors, not traders. This is a very important point that you need to keep in mind.
Number three, the stock price never moves up in a straight line and it does not also fall in a straight line. There is a lot of volatility that up and downswing that keeps on happening. So, therefore, you need to understand that whenever you are investing in an asset class called stocks, you need to bear the volatility. My final tip here would be that your goal as a normal retail investor should be to invest in fundamentally good stocks.
What are fundamentally good stocks?
These are stocks that are making revenues, that are making profits, that have good management, and have a sound fundamental business model. A classic case in point would be Hindustan Unilever or Asian paints. Tell me if their revenues are not growing, take a look at their balance sheet. Take a look at their cash flow statements. Tell me if you see any major problems in these stocks. As a final word to become better investors you must start learning so go and listen to the summary of coffee can investing in cucumbers Additionally start reading the annual report of different businesses.
It will help you understand what businesses are doing, how they are making money, what are some of the key advantages and disadvantages that they have, and what type of macroeconomic challenges they are facing. If you study it, if you invest your time learning about the stock market, you will become a better investor and you will make a lot of money in the process.
