Equity Investing Demystified: How to Build a Winning Portfolio in the Stock Market

Equity investing is one of the most popular and rewarding ways of participating in the stock market. It involves buying shares of companies that are listed on a stock exchange, such as the National Stock Exchange (NSE) or the Bombay Stock Exchange (BSE) in India. By owning shares, you become a part owner of the company and can benefit from its growth and profits.

However, equity investing is not as easy as it sounds. It requires a lot of research, analysis, discipline, and patience to select the right stocks and manage the risks involved. Moreover, the stock market is volatile and unpredictable, which means that prices can fluctuate significantly in a short span of time. Therefore, it is important to have a clear strategy and a well-diversified portfolio to achieve your long-term financial goals.

What are the benefits of equity investing?

Equity investing offers several advantages over other forms of investment, such as:

• Capital appreciation: Equity investing can provide high returns in the long run, as the value of your shares increases with the growth and performance of the company. For example, if you had invested ₹10,000 in HDFC Bank shares in 2001, your investment would have grown to ₹8.22 lakhs by 2021, giving you a compounded annual growth rate (CAGR) of 21.5%.

• Dividends: Equity investing can also generate regular income in the form of dividends, which are a portion of the company’s profits distributed to its shareholders. Dividends can be reinvested to buy more shares or used for other purposes. For example, HDFC Bank has paid dividends consistently every year since 2001, with a dividend yield ranging from 0.5% to 1.5%.

• Liquidity: Equity investing offers high liquidity, which means that you can buy or sell your shares easily and quickly on the stock exchange. You can also access your money anytime you need it, unlike some other investments that have lock-in periods or penalties for early withdrawal.

• Tax benefits: Equity investing can also help you save tax on your capital gains and dividends. According to the current tax laws in India, long-term capital gains (LTCG) from equity investments are taxed at 10% if they exceed ₹1 lakh in a financial year. Short-term capital gains (STCG) are taxed at 15%. Dividends from equity investments are also exempt from tax up to ₹10 lakh in a financial year.

What are the risks of equity investing?

Equity investing also involves some risks that you should be aware of, such as:

• Market risk: Equity investing is subject to market risk, which means that the price of your shares can go up or down depending on various factors, such as economic conditions, political events, industry trends, company performance, etc. The stock market can be affected by both domestic and global events, such as wars, natural disasters, pandemics, policy changes, etc. For example, in 2020, the Nifty 50 index fell by 23.8% due to the COVID-19 outbreak and the subsequent lockdowns.

• Company risk: Equity investing is also subject to company risk, which means that the performance of your shares can depend on the specific factors related to the company you invest in, such as its management quality, financial health, competitive advantage, growth prospects, etc. The company can face various challenges or uncertainties that can affect its profitability and reputation, such as legal issues, regulatory changes, operational failures, frauds, scandals, etc. For example, in 2019, Yes Bank shares plunged by 63% due to its deteriorating asset quality and governance issues.

• Concentration risk: Equity investing can also expose you to concentration risk if you invest too much in one or few stocks or sectors. This can make your portfolio vulnerable to any adverse events or developments that affect those stocks or sectors disproportionately. For example, in 2018, the Nifty IT index fell by 14% due to the depreciation of the rupee and the trade tensions between the US and China.

How do I build a winning portfolio in the stock market?

To build a winning portfolio in the stock market, you need to follow some basic steps and principles:

• Define your investment objective: The first step is to define your investment objective clearly and realistically. You need to ask yourself why you want to invest in equities and what are your expectations from them. You also need to consider your risk appetite, time horizon, and financial situation. Your investment objective will help you choose the right stocks and allocate your funds accordingly.

• Do your homework: The next step is to do your homework and research the stocks you want to invest in. You need to analyse the company’s fundamentals, such as its financial statements, growth potential, competitive edge, future plans, etc. You also need to evaluate the company’s valuation, such as its price-to-earnings (PE) ratio, price-to-book (PB) ratio, dividend yield, etc. You should also look at the company’s technical indicators, such as its price trends, volume patterns, support and resistance levels, etc. You should also keep track of the company’s news and events, such as its earnings reports, product launches, mergers and acquisitions, etc.

• Diversify your portfolio: The next step is to diversify your portfolio and spread your risk across different stocks and sectors. You should not put all your eggs in one basket and invest in a single stock or sector. You should also avoid investing in too many stocks or sectors that can dilute your returns and increase your costs. You should aim to have a balanced portfolio that reflects your investment objective and risk profile. A good rule of thumb is to have 10 to 15 stocks from different sectors in your portfolio.

• Monitor and review your portfolio: The final step is to monitor and review your portfolio regularly and make necessary adjustments as per changing market conditions and your investment performance. You should track the performance of your stocks and compare them with the benchmark indices and your peers. You should also review your portfolio at least once a year and rebalance it if required. You should also book your profits or cut your losses when needed and follow a disciplined approach.

Conclusion

Equity investing can be a rewarding way to create wealth in the long run if done properly. However, it also requires a lot of knowledge, skill, and patience to succeed in the stock market. By following the steps and principles mentioned above, you can build a winning portfolio in the stock market and achieve your financial goals.

(The article is authored by Mr Sidhavelayutham M, Founder & CEO, Alice Blue)