The best stocks to buy in India are the ones that are representative of good businesses. Aside from that, the other important aspect is buying stocks which are considered “undervalued”. Here’s a little more information on those two terms:
- Good business: What is a good business? Well, there are quite a few factors but perhaps the best and most direct factor to decide whether the business is good or not, is “free cash flow”.
- Undervalued Price: What does it mean when a stock is undervalued? To find whether a stock is undervalued or overvalued, you need to know the intrinsic value of the stock first. After that, you need to compare it to the market value. In case the market value is less than the intrinsic value, that stock is considered undervalued.
What is free cash flow?
Good businesses always generate high free cash flows. That automatically leads to a higher intrinsic value. Consequently, a stock with high intrinsic value can easily become undervalued. So, what we can take away from that is that we should always look for stocks of companies with high free cash flow.
What are undervalued stocks?
Let’s take the example of a stock trading at a market price of Rs.100/share. Let’s assume that the calculated intrinsic value of that stock is Rs. 120/per share. Upon estimation, its intrinsic value comes out to be Rs.150/share. Clearly, the market price is lower than the stock’s intrinsic value, making the stock undervalued.
How to Buy Stocks in India?
Choose where to buy stocks from
A lot of stock market investors prefer working with a full-service stockbroker or buy stocks directly from a public company. However, the easiest way to buy and trade stocks is online. It can be carried out through the investment account at an online stockbroker. but the easiest way to buy stocks is online, through an investment account at an online stockbroker. Once your account is funded, you can buy the stock on the online broker’s website in a matter of minutes.
Choose the right stocks
This isn’t as simple as just buying the stocks that seem to be the most profitable. Warren Buffett famously said, “Buy into a company because you want to own it, not because you want the stock to go up.” If Warren Buffet gives some investment advice, you better listen to it.
Start with the company’s annual report — specifically management’s annual letter to shareholders. This will give you a better insight into what’s happening with the business and provide context for the numbers in the report.
Consider starting small by purchasing just a single share to get a feel for what it’s like to own individual stocks and whether you have the courage to see some difficult and volatile stock market periods through without going on anti-depressants. You can add to your position over time as you become braver, bolder, and wiser
Think long term
If you want to succeed in the long run, always maintain your perspective and don’t get perturbed by things beyond your control. What you can do instead is:
- Get the best tools for the job.
- Be mindful of brokerage fees. These can significantly eat into your returns.
- Consider investing in mutual funds, which allow you to buy many stocks in one transaction.