Sensex and Nifty have touched their fresh new lifetime high on the first day of 2021. The nifty has managed to hit 14000 levels for the first time ever, while the Sensex is trading above 47000 levels.
A retail investor like me who invested a few years ago in the stock market is now enjoying the bull run of the stocks. On the contrary, since the market is trading at lifetime highs a newbie investor is in a dilemma when is the right time to invest in stocks? Should I invest or wait for the market correction? Let’s jump into a detailed analysis of is it the right time to invest in stocks.
When is the right time to invest in stocks?
When you are trying to figure out is it a good time to invest in the Indian stock market then let me tell you that the best time to start investing in the stock market is today, specifically right now. Since the bulls and bears are the inseparable part of the stock market. Whatever the investment goal you want to achieve, the right time to invest in stocks is right now.
Instead of considering is it a good time to invest in Indian stock market, you should ask ‘In which stocks should I invest?’
But before start investing in the stock market ask yourself the following 3 questions.
Question #1. Have you created an emergency fund?
The stock market yields the best returns when invested in the long run. At first, do create an emergency fund to meet the short-term cash requirement be it for travel or any unforeseen medical expenditure.
Question #2. Have you protected your family with term insurance plans or health insurance plans?
You are not a superhuman. You should secure your family by buying health insurance plans to meet the unforeseen medical expenditure.
Question #3. Have you diversified your investment portfolio?
According to the famous proverb, don’t put all of your eggs in one basket. You should diversify your investment portfolio across various asset classes namely stocks, bonds, government securities, etc.
Now it’s time you should start investing in the stock market for the long run.
But how to pick a stock that will yield the best returns in the long run?
Here are the top 7 parameters you should consider before investing in any stock.
Parameter #1. Debt to Equity Ratio
The Debt to Equity ratio reveals the financial health of any company. The debt to equity ratio can be calculated when the total outstanding debt a company has is divided with the total assets of the company.
The best company to start investing is where the company is debt-free or have a marginal debt level [<0.25].
Parameter #2. Profit Margin
When it’s time to gauge the profitability of a company profit margin is one of the key matrices often used by analysts. A profit margin reveals how much percentage of profit is generated by a company by carrying out business operations. The higher the profit margin is, the higher the profitability of the company has. For example when a company’s profit margin is 15% then it means that the company has generated a net income of 15 when the total sale of the company stands at 100.
Parameter #3. Earnings per Share
When a company’s profit for a financial year is divided with its total shares outstanding, the result is the Earnings per Share of the company.
When the EPS of a company increases year on year, the chances are higher that the investors are willing to pay a higher price for a stock. They have found that the company has generated higher profit relative to its market price of a stock.
Parameter #4. Dividend Payout
When a company has delivered robust earnings year on year, the chances are higher that the company will declare a dividend to cheer up the investors. Pick a stock that has a track record of paying dividends regularly and increase dividend payout year on year.
Parameter #5. Price to Earnings Ratio
To gauge if the stock is undervalued or overvalued price to earnings ratio is one of the key matrices used by analysts. You can calculate the Price to Earnings ratio by dividing the market price of a share with its earnings per share of a financial year.
A company with a high P/E ratio does not necessarily mean that the stock is overvalued. It may be a clear signal that the investors are optimistic enough that the company will deliver robust earnings in the long run. When you buy a stock with a P/E ratio of 20, then you will get the invested capital in 20 years. But after analyzing the profitability of a business when you have found that the company’s earnings are in the upward direction, then it’s worth investing.
Parameter #6. Price to Book Ratio
The Price to Book Ratio is the final result when the market price of a stock is divided with its book value per share.
The book value is quite helpful to gauge what will be left if the company is bankrupt right now and liquidates all of its assets and pays off the borrowers.
The lower the price to book ratio is the better the investment opportunity is.
Parameter #7. Return on Equity
Return on Equity reveals the management’s efficiency to generate profit from the available capital of shareholders’ equity by running a business operation.
Don’t invest in a company of which ROE is lower than 15. The higher the ROEis, the better business it becomes to invest in.
7 Points to consider before investing in the Stock Market
When you have found the best stocks with intact fundamentals, here are the 7 points you should consider before investing in the stock market.
Start investing right now whatever you can
When you are investing to create a retirement fund or to buy a house 15 or 20 years down the road, then there’s no wrong time to start investing in the stock market.
Let’s make it clear with an example.
When you start investing in the stock market with only ₹1000 but increase your investment 10% year on year, then you will get a whopping amount of ₹60,10,208 after 30 years assuming 12% CAGR.
Don’t start the investment with the borrowed money
The stock market is a voting machine in the short run, but a weighing machine, in the long run. Don’t invest in the stock market by borrowing money from any lender.
Suppose you have taken a loan from any financial institution or bank and invest in the stock market. But after a quarter you find the stock market goes into deep correction and your stocks are down by 20%. Bulls and Bears are the inseparable part of the market. No one can predict the market. But since you have taken a loan you are compelled to repay the principal along with an interest. To repay the loan now you will have to sell the stocks and exit from the market with a huge loss.
From the above example, you should learn that don’t start investing by borrowing money from financial institutions. Instead, start investing with whatever you have and then carry out the investment for the long run to get superior returns.
Avoid the Herd Mentality
When you are investing in the stock market in accordance with the recommendation of your neighbour, relatives, or colleagues, the chances are higher that you will lose all of your hard-earned money in the stock market. Instead, read a couple of best investing books and acquire knowledge of how to pick the best stocks when they are undervalued. Thus you can enjoy the ride in the stock market.
Diversify your stock portfolio
Don’t invest solely in one sector. Do diversify your stock portfolio across various sectors namely Banking and Finance, Automobiles, Consumer Durables, Airlines, etc.
- Read also: 7 Best Bank Stocks to buy now in India
- Read also: 3 Best Insurance Stocks to buy in India
Don’t try to time the market
Let’s make it clear with an example.
Back in 2014, I ran independent research on Titan Company and found that the fundamentals were intact and the stock was available at an attractive valuation. I bought 100 shares of Titan Company at 322 per share. Now, after 6 long years, as of January 2021, Titan Company is trading in 1522 per share.
From the above example, it is clear that, don’t try to time the market, stay invested for the long run to achieve superior returns.
Accumulate more stock when the stock market witnesses a correction
Bulls and Bears are the indivisible part of the stock market. You should turn the sharp correction into an opportunity. When you have gone through a detailed analysis and find the company has intact fundamentals then it’s the golden opportunity to buy more stocks that are available at an attractive valuation. To reap the benefits you should invest regularly in the stock market.
Stay invested in the stock market for the long run
When it’s time to create a retirement corpus to live a worry-free retirement life, stay invested for the long run to get the best returns. But when you want to invest in the stock market to finance your dream car, then avoid the stock market and invest in bonds and government securities. It is because when it comes to stock market investing, the stock market is a voting machine in the short run but a weighing machine in the long run. If you wish to stay invested in the stock market for the long run, then you don’t need to worry even if the stock deep 10% the next day.
Final Thoughts
If you are waiting for the right time to invest in stocks, you will possibly miss the bull run of the stocks.
No matter what is the investment amount, the best time to start investing in the stock market was yesterday. The next best day to buy stocks is today and the worst day to start investing is Tomorrow.
- Read also: 15 Best Indian Stocks to Buy for Long Term Investment
- Read also: Best Time(s) of Day, Week, and Month to Trade Stocks
For what are you waiting? Start investing right now.
Hope this article will help you to find the right time to invest in stocks. When you have found this article helpful, feel free to share this post.