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How To Buy Stocks In A Bull Run?

IndianMoney.com Research Team | Posted On Wednesday, September 05,2018, 06:43 PM

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How To Buy Stocks In A Bull Run?

 

 

The 30-share BSE Sensex hit the all-time high in July this year.  The Sensex crossed the previous peak of 36,443 and investors spoke of a multi-year bull run. The BSE Sensex is over 38,000 and the Nifty 50 is over 11,500, today.

Your dilemma… How to buy stocks in a bull run? Navigating a bull market is extremely tricky and if you play smart, you can emerge a winner.

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How To Buy Stocks In A Bull Run?

Careful observation will show you, the Bull Run is because of a few top stocks. Just 5-6 quality stocks are pumping up the stock markets. TCS, HDFC Bank, RIL, HDFC, Infosys, Kotak Mahindra Bank, Bajaj Finance, L&T, IndusInd Bank, HUL, Asian Paints, Yes Bank are contributing heavily to the rally. Mid-cap and small-cap stocks are quite low and are not contributing much to the Bull Run. What does this tell you? Most investors are seeking solace in the top performers or the top 10 stocks.

1. What are stocks?

Buying a stock means you buy a unit of a Company. You and other investors can buy stocks of Companies listed on the stock markets like the BSE and the NSE. A stock gives you ownership of a unit of a Company. The Company uses this money for the growth and expansion of the business.

A Company offers its shares to the public for the first-time, through an Initial Public Offer (IPO). The Company keeps the money raised from the IPO and uses it to grow the business. The stocks of the Company are listed on the NSE or the BSE.

2. Different types of stocks

  • Common stock vs Preferred stock:

Common stocks are the ordinary shares which represent part ownership in a Company and give you voting privileges. A preference share promises the holder a fixed dividend. The payment of the fixed dividend is given priority over ordinary share dividends.

The price of preferred stock is less volatile vis-à-vis common stock and Company surplus money is first distributed to Preference stock holders. Preference stock holders have less voting rights, vis-à-vis common stock holders.

  • Hybrid stocks: Hybrid stocks are preferred shares which come with the option to be converted to common stock at a time of your choice. They have less voting rights vis-à-vis common stock.
  • Stocks with embedded-derivative options: These stocks have the callable and the putable option. A callable stock gives a Company the option to buy back shares at a fixed/certain price or time. The putable stock gives you an option to sell shares at a certain price or time.
  • Stocks classified on the basis of market capitalization:

You can classify stocks based on the total shareholding of a Company’s market value. You need market capitalization, which is the market price of the share * total number of outstanding shares. (Shares subscribed by investors).

Small-cap stocks: These represent small-size Companies.  Small-cap stocks have market capitalization up to Rs 250 Crores. You invest in small Companies and shares are available at low prices. You have to stay invested for the long term and face price volatility.

Mid-cap stocks: These represent Mid-size Companies. They have market capitalization ranging from Rs 250 Crores to Rs 4,000 Crores. They are the baby blue-chips which enjoy steady growth and a good track record. How are they different from large-caps? They lack in size vis-à-vis large caps.

Large-cap stocks: These represent Large-size Companies with market capitalization of over Rs 10,000 Crores.

See Also: Stock Exchanges In India

3. How Stocks Trade?

You can buy/sell stocks on NSE and BSE. You can buy shares through online trading or even offline brokerage firms. The aim of a stock exchange is aiding in buying and selling stocks.

STEP 1:

Receive client ID and fill the Dematerialization Request Form (DRF).

STEP 2:

Appeal through NSDL with the DRF and the certificates.

STEP 3:

Establish V-Sat connection with NSDL.

STEP 4:

Send confirmation to NDSL.

Step 5:

Demat approval from NSDL.

Step 6:

Shares are deposited in the demat account and declare holdings.

SEE ALSO: Prepayment Of Home Loan

4. Types of Order in the Stock Market

Market Order: A market order allows you to buy or sell shares at the prevailing market price. You can buy or sell shares during normal market hours of 9:15AM to 3:30PM. The order is executed in seconds.

Limit Order: In a limit order you specify the maximum amount you are willing to pay for a share. If you are selling, it’s the minimum amount you are willing to accept for the shares.

Stop-loss: It is an order to sell a share at a specific price to limit a loss.

5. Bulls, Bears and the Market Sentiment

What is a bull market? A bull market is one in which share prices are rising and you are tempted to make the purchase. A bear market is one in which the share prices are falling and you are encouraged to sell.

Market sentiment is the attitude of investors towards shares. It’s all about crowd psychology. Bullish investors believe a stock/market will go higher and higher. Bearish investors believe a stock/market will go lower and lower.

6. How to read the BSE Sensex Table?

The S&P BSE Sensex is also called the BSE 30 or the Sensex. It is a free- float (a float factor gives the number of outstanding shares), market-weighed stock market index and comprises of 30 well established Companies.

What is a market-weighted stock index? This is a stock market index where the components are weighed according to the total market value of outstanding shares. 

7. How to value stocks?

  • Study the Company: Understand the line of business. Concentrate on the management. Check for economic moat which is a big advantage this Company has over peers and rivals.
  • Integrity: A bad leader = bad followers. Check the management of the Company.
  • Earnings: Invest in a Company with consistent earnings.
  • Valuation:

P/E Ratio: The P/E Ratio tells you how much an investor is willing to pay for every rupee the Company earns. If the P/E ratio is 15, an investor is willing to pay Rs 15 for Re 1 of EPS.

Dividend Yield: Dividend Yields give an idea on how much a shareholder earns per share, through total dividends from his investments.

Dividend Yield = Total Annual Dividend per share / Current Share Price.

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