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market capitalization in Indian stock market COVER

Basics of Market Capitalization in Indian Stock Market.

Basics of Market Capitalization in Indian Stock Market. Let’s start this post with a general question. The stock prices of two famous Indian companies are given below.

MRF= Rs 69,780

HDFC Bank= Rs 1,650

What do you think? Which company is bigger?

If you think that MRF is a bigger company as its share price is too big compared to HDFC bank, then you need to read this post completely.

You cannot judge the size of the company just by looking at its share price.

To understand the answer of the question about which company is bigger, you need to understand the concept of market capitalization. So, be with me for the next 8-10 minute to learn everything about market capitalization in Indian stock market.

Here are the contents which are going to cover in this post:

  • Classification of companies in Indian stock market.
  • What is Market Capitalization?
  • How are companies classified using market capitalization in Indian stock market?
  • What are large, mid and small cap companies? – With examples
  • How to track the performance of different classifications of companies in Indian Market?
  • What are Blue Chips stocks?
  • Top 10 blue chips companies in Indian stock market.

Let’s get started.

Market Capitalization in Indian Stock Market

Classification of companies in Indian stock market:

Any company in Indian stock market can be classified in one of the following categories:

  1. Large Cap
  2. Mid Cap
  3. Small Cap

market capitalization in indian stock market

Here cap means capitalization. Although there are few other categories also like Mega-cap, Microcap etc, however, they aren’t used much in classifying the stocks.

These companies are classified based on their market capitalization, which we are going to discuss next.

What is Market Capitalization?

Market capitalization shows the size of the company and its aggregate value. Let us define market capitalization now:

Market Cap or Market capitalization refers the total market value of a company’s outstanding shares.

It is calculated by multiplying a company’s outstanding shares with the current market price of one share.

*Outstanding Shares refers to all shares currently owned by stockholders, company officials, and investors in the public domain.

Market Capitalization = (Total no of outstanding share) * (Price of one share)

For example, let us assume for a company ABC,

Total number of outstanding shares= 1,00,000

Current price of 1 share= Rs 1,500

Market capitalization = 1,00,000* 1,500 = Rs 15,00,00,000

Therefore, the market capitalization of company ABC is Rs 15 Crores.

Now, let us move back to our original question. Which company is bigger? HDFC Bank or MRF?

We need to find the market capitalization of both these companies to figure out which one is bigger.

MRF
Total Number of outstanding shares 42,41,143
Current market price of one share Rs 69,780
Market Capitalization Rs 29,635 Crores
HDFC Bank
Total Number of outstanding shares 270,95,42,308
Current market price of one share Rs 1,650
Market Capitalization Rs 4,30,532 Crores

From the above table, we can notice that the market capitalization of HDFC bank is around 15 times that of MRF. Hence, HDFC bank is a much bigger company than MRF.

The skyrocketing share price of MRF is insignificant when we compare the total number of outstanding shares of MRF with HDFC bank.

In short, the share price cannot decide the size of a company. It’s the market capitalization which is used to classify the companies based on size.

If you want to learn stocks from scratch, I will highly recommend you to read this book: ONE UP ON THE WALL STREET by Peter Lynch- best selling book for stock market beginners.

How are companies classified using Market Capitalization in Indian stock market?

There is no hard and fast way rule (criteria) to define the classification of the companies based on the market capitalization. If you refer different financial websites, the range of market cap will vary for different capitalization.

However, in general, here is the commonly accepted classification of companies based on the market capitalization in Indian stock market.

Market Capitalization Classification
Less than 500 Cr Small cap
Between 500 Cr to 10,000 Cr Mid Cap
Greater than 10,000 Cr Large cap

 

Why there in no fixed market capitalization range for classifying companies?

Bombay stock exchange (BSE) uses the 80-15-5 rule to classify the companies in large cap, mid cap or small cap. Now, let me explain this 80-15-5 rule.

Also read: S&P BSE Mid Cap and BSE Small Cap Index

The rule classifies the different companies listed on the exchange based on the decreasing order of their market capitalization in Indian stock market.

  • The largest market capitalization which covers up to 80% of the total market cap of all the listed company on the BSE is categorized as large cap company.
  • The next set which covers the 80-95% of the total market capitalization of all the listed company on the BSE is categorized as mid cap company.
  • Lastly, the set which covers 95-100% of all the listed company on the BSE is categorized as small cap company.
% of Total Market Capitalization Classification
 80% Large Cap
15% Mid Cap
5% Small Cap

Since the share price and market caps are dynamic; hence, there is no fixed market cap segment limit for classifying companies.

A few years ago, companies with a market capitalization around 10,000 crores- were considered to be large cap company. Now, they are mid cap company for this market cap.

Most small cap companies are start-ups or in developing phase. They have a high growth opportunity. However, due to high failure rates of small caps, they also have a high risk.

What are large, mid and small cap companies?

“Every large cap company was a mid cap/ small cap once. However, every small cap company is not certain to become a mid/large cap.”

Large Cap companies:

They are the big and well-established company. Most of the large-cap companies are leaders in their sector and have a huge market presence. Many of the large cap companies are listed in Sensex 30 and Nifty 50. These companies have a very large capitalization to survive in adverse economic conditions. Here is the example of few large cap companies:

Company Name Industry Last Mkt Cap
Price (Rs cr)
Asian Paints Paints & Varnishes 1,153.95 110,686.63
Axis Bank Banks – Private Sector 504.6 120,949.11
Bharti Airtel Telecommunications – Service 365.9 146,264.87
Coal India Mining & Minerals 245.4 152,329.82
HDFC Bank Banks – Private Sector 1,678.55 430,532.82
Hero Motocorp Auto – 2 & 3 Wheelers 3,660.30 73,095.03
ICICI Bank Banks – Private Sector 291.5 186,912.15
Infosys Computers – Software 943.35 216,682.27
ITC Cigarettes 310.85 377,601.40
Kotak Mahindra Banks – Private Sector 985.45 187,552.70
M&M Auto – Cars & Jeeps 1,376.05 85,471.26
Maruti Suzuki Auto – Cars & Jeeps 7,237.20 218,621.38
Reliance Refineries 1,435.00 466,581.02
SBI Banks – Public Sector 288.85 230,314.68
Tata Motors Auto – LCVs & HCVs 443.1 150,470.15
Tata Steel Steel – Large 507.4 49,279.47
TCS Computers – Software 2,360.65 465,149.07
Wipro Computers – Software 256.85 124,987.03

Mid Cap companies:

These represent mid-sized companies that are relatively riskier than large-cap as investment options, yet they are not considered as risky as small-cap companies. These companies have a potential to become a large cap in few years and have enough finance to survive harsh economic conditions.

Here are few examples of mid-cap companies:

Company Name Industry Last Mkt Cap
Price (Rs cr)
Allahabad Bank Banks – Public Sector 69.65 5,179.80
Apollo Hospital Hospitals & Medical Services 1,279.60 17,802.46
Blue Dart Couriers 4,233.45 10,045.10
CRISIL Miscellaneous 1,908.55 13,618.86
GE T&D India Power – Transmission & Equipment 342.05 8,758.07
Jaiprakash Asso Infrastructure – General 18.78 4,568.15
Reliance Comm Telecommunications – Service 21.2 5,276.64
Tata Global Bev Plantations – Tea & Coffee 151.15 9,539.53
Torrent Power Power – Generation & Distribution 176.25 8,470.87
Videocon Ind Consumer Goods – Electronic 17.2 575.27

You can find the list of more mid-cap companies here: http://www.moneycontrol.com/stocks/marketstats/indexcomp.php?optex=BSE&opttopic=indexcomp&index=25

Small Cap companies:

These companies have small market capitalization and usually includes the start-ups or companies in the early stage of development. Small cap stocks are potentially big gainers as they are yet to be discovered within the sector. However, the risk level is high while investing in small-cap companies.

Here are few examples of small-cap companies:

Company Name Industry Last Mkt Cap
Price (Rs cr)
Bombay Dyeing Textiles – Processing 83.2 1,718.37
Career Point Computers – Software – Training 100.75 182.69
D-Link India Computers – Hardware 99.95 354.87
Eros Intl Media & Entertainment 224.6 2,121.35
Everest Ind Cement – Products & Building Materials 362.4 558.93
Fineotex Chem Chemicals 31.45 350.04
Gati Couriers 128.85 1,267.50
Godawari Power Steel – Sponge Iron 93.35 318.42
Indraprastha Hospitals & Medical Services 52.95 485.41
Jayshree Tea Plantations – Tea & Coffee 100.35 289.79

You can find the list of small-cap companies here: http://www.moneycontrol.com/stocks/marketstats/indexcomp.php?optex=BSE&opttopic=indexcomp&index=26

Here is a summary of the large cap, mid cap, and small-cap companies.

Criteria Small Cap Mid Cap Large Cap
Risk Very high High Low
Return Very high High Low
Liquidity Low High Very high

Also Read: How To Select A Stock To Invest In Indian Stock Market For Consistent Returns?

How to track the performance of different classifications of companies in Indian stock market?

You can track the performance of the companies of different classification of the various financial websites like Money control, BSE India, NSE website etc.

It would be best if you use BSE India website for tracking. Here is a link, which you can use: http://www.bseindia.com/sensexview/indexview_new.aspx?index_Code=82&iname=BSE30#

  • S&P BSE Sensex is used to show the performance of the large-cap companies.

S&P Sensex midcap

What are Blue Chips stocks?

Blue chips are the nationally recognized, well established and financially sound companies.

These are the stocks of those reputed companies who are in the market for a very long time, financially strong and have a good track record of consistent growth and returns in the past many years.

Blue chip companies have huge market capitalization and are generally leaders in their market.

For example- HDFC bank (leader in the banking sector), Larsen and turbo (leader in the construction sector), TCS (leader in the software company) etc. Few other examples of blue chip stocks are Reliance Industries, Sun Pharma, State bank of India etc.

These companies have a stable performance and are very less volatile. That’s why blue chip stocks are considered safe to invest compared to other companies.

Why are they called ‘Blue chip’ stocks?

The term ‘Blue chip’ has been derived from ‘Poker’ game.

In poker, blue chips are considered to be most valuable.

Mr Oliver Gingold, who used to work in Dow Jones, is credited to bring this name in the stock market. He used this name first time in 1923 referring it with few most valuable companies of that time. Later, the term ‘blue chips’ became popular to cite the reputed companies of the stock market.

Blue-chip stocks are known to give good consistent dividends to their shareholders.

These companies have a huge liquidity, which means that there are a large number of buyers and sellers in these stocks. So, they can be easily bought or sold anytime.

Besides all these pros of the Blue chip stocks, there are few cons too.

It’s not necessary that these companies will always perform. There are a number of examples of companies which were a blue chip in the past but are not anymore. Although most of them survive harsh economic conditions, nevertheless few blue chips stocks are financially hit hard by recessions and extreme adverse conditions.

In addition, as these companies have already achieved great success, therefore a large growth possibility is very less for such stocks. So, it will be very less likely to make quick returns or sharp profit in these stocks.

However, the chances of a sharp downfall are also very less in blue-chip stocks. Therefore, they are considered very less risky.

Few of the good properties of these stocks are- stability, consistent returns, good financial backup, less volatility and high liquidity.

Overall, Blue chip stocks are a good option for a safe long-term investment.

Top 10 Blue Chips stocks in Indian stock market.

Here is the list of top 10 blue chips stocks in Indian stock market.

S. No Company Sector
1 Reliance Industries Refineries, Oil & Gas
2 TCS Software company
3 HDFC Bank Non public sector banking
4 ITC Cigarette, Hotels, Consumer products
5 ONGC Oil drilling & Exploration sector
6 Infosys IT Software
7 SBI Public sector bank
8 HDFC Financial company
9 HUL Consumer products
10 Coal India ltd Mining

Conclusion:

The various companies can be classified based on the market capitalization in Indian stock market as large, mid and small-cap companies. A thumb rule for classifying them is shown below:

Market Capitalization Classification
Less than 500 Cr Small cap
Between 500 Cr to 10,000 Cr Mid Cap
Greater than 10,000 Cr Large cap

The selection of a company to invest depends totally on your preference.

  • If you looking for a steady long-term investment, select large-cap companies to invest.
  • If you are looking for high profits and quick returns, then you should invest in small or mid-cap companies.

Ready to start your journey to become a succesful stock market investor? If yes, then here’s an amazing course for newbie investors: INVESTING IN STOCKS- THE COMPLETE COURSE FOR BEGINNERS.

I hope this post ‘Basics of Market Capitalization in Indian Stock Market’ is useful to the readers.

Do comment below if you have any doubts or suggestions.

Tags: market capitalization in Indian stock market, what is mid cap and small cap, what is large cap., what is market capitalization in Indian stock market, what is meant by market capitalization

Hi, I am Kritesh, an NSE Certified Equity Fundamental Analyst. I’m 23-year old and an electrical engineer (NIT Warangal) by qualification. I have a passion for stocks and have spent my last 4+ years learning, investing and educating people about stock market investing. And so, I am delighted to share my learnings with you. #HappyInvesting (Connect with me over twitter here).

How To Select A Stock To Invest In Indian Stock Market For Consistent Returns

How To Select A Stock To Invest In Indian Stock Market For Consistent Returns?

How to select a stock to invest in Indian stock market for consistent returns?

“Long ago, Ben Graham taught me that ‘Price is what you pay; value is what you get.’ Whether we’re talking about socks or stocks, I like buying quality merchandise when it is marked down.”
-Warren Buffett

So, you are interested in stock market and want your money to grow. You have read a number of investment blogs, financial magazines and subscribed to the Stock TIPS and recommendations from different brokers.

However, you are afraid to take next step. You know that over 90% of people lose money in stock market. Most of them lose because they do not do their homework first and rely mostly on their brokers to select a stock to invest in Indian stock market. Therefore, you decide to take the matters in your hand and intelligently select a stock to invest in Indian stock market. You know that by doing so, either you will win or you will learn. No, a third way.

If you are one of such investor and want to smartly select a stock to invest in Indian stock market for consistent returns, then you are at the right place. In this post, I will explain to you 8 steps with questions to be answered to select a stock to invest in Indian stock market to avoid loss and get consistent returns. So, be with me for the next 10-15 minutes to learn the secret to intelligently select a stock to invest in Indian stock market.

8 steps to select a stock to invest in Indian stock market:

1. Does the company have good fundamentals?

To find the answer to this question, there is a 2-minute drill to find a fundamentally strong company. Using this drill, you can filter the healthy companies so that you can proceed to investigate further. If the company is not fundamentally strong, there is no need to learn more about its products/services, competitors, future prospects etc.

You can move to the next steps only once you confirm that the company has given good past performance and is worth investing in. For this 2-minute drill, you need to look into the financials of the company. Here are 8 financial ratios and their trend that should be carefully noted in this step:

    1. Earnings Per Share (EPS) – Increasing for last 5 years
    2. Price to Earnings Ratio (P/E) – Low compared to companies in the same industry
    3. Price to Book Ratio (P/B) – Low compared companies in the same industry
    4. Debt to Equity Ratio – Should be less than 1 (Preferably debt<0.5 or Zero-Debt)
    5. Return on Equity (ROE) – Should be greater than 20%
    6. Price to Sales Ratio (P/S) – Smaller value is preferred
    7. Current Ratio – Should be greater than 1
    8. Dividend – Increasing for the last 5 years

If you are not familiar with these financial ratios, you can read more here: 8 Financial Ratio Analysis that Every Stock Investor Should Know

Once you are confident that the company fulfills most of the criteria mentioned above, then study the financial reports of the company. Reading financial reports (Profit & loss statement, balance sheet, and cash flow statement) can take a little time. That’s why first make sure that the company passes the 2 min drill before you start investigating further. I have written a detailed post on how to read financial statements of a company, which you may find useful.

These financial results, however, gives the past growth. You cannot decide whether the company will perform same or better in the future based on just past trends. Therefore, you need to consider other important factors while evaluating to select a stock to invest in Indian stock market. These factors are discussed in the next steps.

2. Do you understand the products or services offered by the company?

select a stock to invest in Indian stock market 5

After filtering the companies according to their financial fundamentals, you need to investigate about the company. Understand the company first. Learn about its product and services. It’s important that the company is easy-to-understand and has a fairly straightforward business model.

You might ask why is it so important to understand the company. Let’s comprehend this with the help of an example. Let’s say you have to choose a classmate who you will ‘buy’ by paying him what he would earn in the first twelve months of working. In return for which he will give you a quarter of his earnings thereafter for the rest of their lives. Whom will you choose?

While choosing, you must be thinking to select the one who is most likely to have a great income in the future. Further, will you will not choose a guy/girl whom you know nothing about. As you don’t know that person, there is no way that you can predict how much he/she will earn in the future. The same goes for the stocks. If you can understand the stock, you can easily take a good decision whether to buy, hold or sell the stock at any time. Hence, always invest in the companies that you understand.

There are a number of companies that everyone knows and understand. From toothpaste, soaps, towels, t-shirts, jeans, shoes to bikes, cars, airlines, banks; there is a company behind every product. Invest in such companies. Do not buy the stock of ‘ABC Pharmaceuticals’ without knowing what medicines/products it produces.

3. Will people still be using this product or service in 15-20 years from now?

The next step is to ask about the life of the company. Always look for a company with a long life. Such companies have huge growth potential and the power of compounding applies to such companies. Some companies have a life of just a few years.

For example, do you think people will be using soaps in 20 years from now? The answer is ‘Yes’. It’s been there for over 100 years and will surely continue in the future. Maybe the fragrance will change, but the soap will be there. Now, take another example. What do you think about a pen-drive or USB manufacturing company? Do you think that people, 20 years from now, will still use pen drives? The answer is no. Overall, select only a stock to invest in Indian stock market that will last for the next 15-20 years.

If you want to learn stocks from scratch, I will highly recommend you to read this book: ONE UP ON THE WALL STREET by Peter Lynch- best selling book for stock market beginners.

4. Does the company have a low-cost durable competitive advantage?

“I like businesses I can understand. We’ll start with that. That narrows it down about 90% …There’s all kinds of things I don’t understand, but fortunately there’s enough I do understand. You got this big, wide world out there. Almost every company is publicly owned…You got all American business, practically, available to you. Now, to start with, it doesn’t make sense to go with things you think you can[‘t] understand. But you can understand some things. I can understand this. I mean you can understand this. Anybody can understand this. I mean this is a product that basically hasn’t been changed much…since 1886…and it’s a simple business. It’s not an easy business. I don’t want a business that’s easy for competitors. And I want a business with a moat around it. I want a very valuable castle in the middle. And then I want…the Duke who’s in charge of that castle to be honest and hard working and able. And then I want a big moat around the castle, and that moat can be various things.”

Warren Buffet (Source: Warren Buffett On Economic Moats)

Invest in companies with ‘MOAT’

This ‘MOAT’ concept was popularized by Mr. Warren Buffet. A moat is a deep, wide ditch surrounding a castle, fort, or town, typically filled with water and intended as a defense against attack. Some stocks have a similar moat around them. That’s why it’s really tough for its competitors to defeat them in its sector.

For example, Colgate! It has become such a common name in Indian homes that Colgate is considered as a synonym to toothpaste. Another example is Cadbury– the chocolate producing company. This company is dominating its industry and the people are even ready to pay a lot more to buy its products. Similarly, Tata Motors has got a moat in ‘truck’ sector. Tata Trucks has been in dominating in Indian automobile sector for last 5 decades.

select a stock to invest in Indian stock market 1

In addition, while selecting an ‘unbreathable moat’ look for such companies in which the switching cost is high. For example, Banks. How rarely people change their bank accounts just because the competitor is giving 0.5% more interest rate. Coal India, ITC, Asian Paints are few of the other Indian companies with big moats.

5. What is the company doing that its competitors are not?

Find the unique selling point of the company. Learn what this company is doing which it’s competitors are not.

To understand better, let us analyze the Indian automobile sector. There are a number of automobile companies in India. However, when we consider the passenger vehicles (Cars and SUVs), Maruti Suzuki is the leading company in India. There are a number of competitors against Maruti in this sector like Tata Motors, Hyundai, Honda, Ford etc.

Nevertheless, Maruti Suzuki is dominating because of the easily available service centers that it provides. Maruti’s service center can be found on every corner of the streets. It’s really simple and easy to get a Maruti car serviced even in small cities. On the other hand, try to get your ‘FORD’ car serviced. You will rarely find any authentic ford service center around you. That’s why people prefer buying Maruti cars in India.  And hence, Maruti Suzuki is able to increase its sales consistently and give good returns to its shareholders.

select a stock to invest in Indian stock market 7

Overall, investigate first what the company is doing that its competitors are not before you select a stock to invest in Indian stock market.

6. Does the company have big debt?

select a stock to invest in Indian stock market 2

Big debts in a company are same as the big hole in the boat. If the hole in the boat is not filled soon, then it won’t be able to cross the long sea and will definitely sink. When you select a stock to invest in Indian stock market, read its financial documents carefully. Avoid companies with big debts. Many times, the accountants use the financial loopholes to hide the debt in their annual results. However, if you read the financials minutely, you will be able to find these debts, as the financial sheet always needs to be balanced.

While investing the companies in the banking sector, look for its Non-performing assets (NPA). Avoid companies in the banking sector with huge NPA’s.

 7. Is the company’s management efficient and qualified?

select a stock to invest in Indian stock market 4

This is one of the most crucial questions to ask before you select a stock to invest in Indian stock market. The management is the soul of the company. A good management can prosper the company to new heights. On the other hand, a bad management can lead to the downfall of the company. Hence, it’s really important to research carefully about the management of the company that you plan to invest in Indian stock market. First, do some research, and find out who is running the company. Among other things, you should know who its CEO, CFO, MD, and CIO are along with their qualifications and past experience. Next, here are few points to check the efficiency of the company:

  1. Strategy and goals:

    Go through the Vision, Mission and Value statement of the company. Together, mission and vision guide strategy development, help communicate the company’s purpose to shareholders and inform the goals and objectives set to determine whether the strategy is on track. Hence, these defined future statements for the company can help an investor to decide whether to select a stock to invest in Indian stock market or not.

  2. Length of tenure:

    This can help to judge the stability in the management of the company. A long length of tenure of the top management with the steady growth of the company is a good sign. However, sometimes, a change in the management is considered an adept signal when the last management was not performing well. Nevertheless, the long tenure of a good management is the sign of a healthy company.

  3. Insider buying and share buybacks:

    The insiders of the company have the best knowledge about the company’s performance. The management and the top officials can understand the future aspects of the company and if they believe that the company will outperform in the future, they are mostly correct. Therefore, the insider buying and share buybacks are signals that the owners trust in the future of the company and it’s a good company to select a stock to invest in Indian stock market.

    In addition, the other scenario, where the insiders or CEO is selling the stocks, is an independent activity and cannot be treated as a bad signal. We cannot judge the company’s future is bad just because the insiders are selling the stocks. Maybe, the insiders need money to start another venture. Or maybe, the insiders are selling the stock to buy a new house. Maybe, the insiders are selling the stock to just enjoy the money. Everyone has the right to sell stocks when they need it.

    In short, the insider buying and share buybacks are signals of good company. However, we cannot judge the company’s future based on the insider’s selling the stock. Please note, if the insiders are selling their complete lot of stocks, then it’s a matter to investigate further.

  4. Perks and compensations to staff and workers:

    If the company is giving good perks to its staff and employees, then again it’s a sign of good management. The results of a company depend a lot on the performance of its staff and employees. The happy employees will give their best performance. However, if there is a continuous workers strikes or increasing worker union demands, then it means that the management is not able to fulfill the needs of its workers and employees. Such cases are a bad sign for investors in the company.

  5. Financial ratios ROE and ROCE:

    The management’s efficiency can also be judged using few financial ratios. Return on Equity (ROE) and Return on Capital Employed (ROCE) are the best tools to judge the management’s performance and the resulting potential for the future growth in value.

    ROE is the percentage expression of a company’s net income as it is returned as a value to shareholders. This formula allows investors and analysts an alternative measure of the company’s profitability and calculates the efficiency with which a company generates profit using the funds that shareholders have invested.
    ROCE is the primary measure of how efficiently a company utilizes all available capital to generate additional profits. Source: Investopedia

    A high and steady ROE and ROCE for the last few couple of years is considered a sign of good management. As a thumb rule, invest only in companies with the ROE and ROCE of above 20% continuously for the last 5 years.

  6. Transparency:

    This is the last, but one of the most important factor while judging the management. The integrity of the management is the key to the growth of the company. It’s the management’s duty to give a ‘fair’ quarterly and annual results to its shareholders. Just as the management announces the good results of the company; in the same way, the management should come forward in the times of bad results to explain its reasons to its shareholders. A good management always maintains the transparency of its organization.

 8. Is the company constantly in the news and overly popular?

select a stock to invest in Indian stock market 3

The stock market is based on the sentiments of the people. Consistent news affects the expectations and decisions of the public. Stocks, which are popular in news, can be inflated by the hype of the media. As people expect great results from such companies, even after giving good returns the stock prices of such companies falls. That’s why try to avoid buying stocks of such companies for easy returns. The hot stocks are subjected to market volatility and the boring stocks are the one, which gives the best returns.

Few other quick tips to select a stock to invest in Indian stock market:

  • Cheap isn’t always good, and expensive isn’t always bad:

    While investing in growth stocks, sometimes it’s okay to invest the stocks with high P/E ratio. Some growth stocks have huge future potentials and can give multiple times returns. Moreover, while selecting an undervalued stock, you should investigate further why the stock is undervalued. Many companies sell cheaply because they do not have much growth opportunity in the future. For example, Coal and mining sector.

  • Invest in mid-cap companies:

    The mid-cap companies can give the best returns. These companies have the potential to become a large-cap company in the long term frame. They have a high growth rate compared to the large caps which have already reached a saturation and the chances of giving multiple time returns are highly unlikely. In addition, Mid-cap companies have the good capital to stay out of debt and live a long life. Overall, a good growth mid-cap stock can easily become a multi-bagger, i.e. a stock which gives multiple times returns.

  • Past results do not guarantee future performance:

    Do not rely totally on the financial reports to select a stock to invest in Indian stock market. The report shows the past performance of the companies. However, the future growth depends on various aspects of management, competitors, industry etc.

These are the key points to consider while choosing a stock to invest. Now, let us summarize the 8 steps with questions to be answered to select a stock to invest in Indian stock market:

1. Does the company have good fundamentals? 2-minute drill to filter companies using financials.

2. Do you understand the products or services offered by the company?

3. Will people still be using this product or service in 15-20 years from now?

4. Does the company have a low-cost durable competitive advantage?

5. What the company is doing that its competitors are not?

6. Does the company has low debt?

7. Is the company’s management efficient and qualified?

8. Is the company constantly in news and overly popular?

That’s all! I hope you have understood all the steps and questions to be answered before you select a stock to invest in Indian stock market.

Let me know what you think about this procedure in the comment box below. In addition, if you have any doubts regarding any point mentioned in this article, then feel free to comment below. I will be happy to help you out. #HappyInvesting.

New to stocks? Confused where to start? Here’s an amazing online course for fundamental investment- HOW TO PICK WINNING STOCKS? The course is currently available at a discount.

Hi, I am Kritesh, an NSE Certified Equity Fundamental Analyst. I’m 23-year old and an electrical engineer (NIT Warangal) by qualification. I have a passion for stocks and have spent my last 4+ years learning, investing and educating people about stock market investing. And so, I am delighted to share my learnings with you. #HappyInvesting (Connect with me over twitter here).