This blog delves into perspectives shared by Mr. Aditya Joshi, the co-founder and CEO at Sovrenn who has made more than ₹25 crores through stock investing. From stock investing, his returns have been over 50% CAGR for the last four to five years.

Today, with his insights, let us understand what exactly the stock market and how it works, and what strategies one can use to pick the best stocks.

How does the stock market work?

The stock market is a trading place where shares of various listed companies are bought and sold. It serves as a facilitator between companies that issue equity and investors who find ownership and returns. So, let’s see the way it works.

Companies issue initial public offerings (IPOs) through listing their stocks on stock exchanges, NSE or BSE. This allows them to raise funds for business expansion.

After listing, shares are traded on the stock exchange. Stock prices are determined by demand and supply. If more people want to buy a stock, its price goes up. Conversely, if more people want to sell, the price decreases.

By purchasing shares, investors become part-owners of a company and may earn through capital appreciation (stock price increases) and dividends.

The system works through brokers, exchanges, and regulators like SEBI. Depositories like NSDL and CDSL ensure the safety of your holdings, even if your broker goes bust.

However, to navigate the stock market effectively, it is crucial to understand the distinction between trading and investment, as both approaches cater to different financial goals and risk appetites.

Trading vs Investment 

In trading, one buys and sells stocks frequently over a short period to profit from market price fluctuations. Whereas, in investing, people hold stocks for the long term to generate long-term wealth. 

Aspect	Trading	Investment
Time Horizon	Short-term (days to months)	Long-term (years to decades)
Objective	Generate quick cash flow	Build wealth over time
Approach	Relies on technical analysis	Focuses on fundamental analysis
Risk Level	Higher due to frequent transactions	Lower with a long-term perspective

Basically, trading is for cash flow generation, and investing is for wealth creation. But, both require a strategic approach to selecting the right stocks for investment.

How to Narrow Down Stocks for Investment?

To find the right stocks, it’s important to focus on specific parameters

1. Start with Developing Economies: Focus on where the growth is, Markets in developing economies such as India are more likely to grow, unlike stagnant ones like Japan.
2. Spot the Growing Sectors: Within the economy, look for sectors on the rise—like renewable energy or tech. Also, keep an eye on the sectors in focus by the government.
3. Stick to Non-Cyclical Sectors: Avoid businesses that swing wildly with the economy (like Auto). For e.g. FMCG, healthcare, or utilities for steady margins.
4. Strike a balance between large Caps & Small Caps: Large caps are good for Stability while small caps carry higher risk, but have a big upside.

After narrowing down a list of potential companies, the next step is to evaluate and pick the right ones from this list to align with your investment goals.

How to fundamentally evaluate the companies?

To assess a company’s health, you need to scrutinise its 3 key financial statements.

1. Profit and Loss (P&L) Statement

• The P&L statement reveals whether a company’s profits are growing over time.
• Look for companies with a consistent five-year profit growth trajectory. Such patterns often indicate sustained success.

2. Balance Sheet

• Focus on a company’s assets and debt. A growing asset base often signifies expansion and future profit potential.
• Beware of high debt levels. Use the interest-to-operating-profit ratio to evaluate whether a company’s debt is manageable.

3. Cash Flow Statement

• This statement shows how much cash a company is generating.
• A red flag arises when profits appear on the P&L statement but cash flow remains negligible or negative, hinting at possible irregularities. For example, if a company reports profits of ₹100 crore in its P&L but shows zero cash flow, meaning no actual cash is coming into the business, this can be considered a red flag.

Also, a smart way to gauge a company’s trustworthiness is by examining its partners. If an army, for example, places orders with a company, it likely means the company is genuine.

Where to find the relevant information?

Companies must disclose material information, like large orders, to stock exchanges (BSE/NSE). Even smaller orders are often disclosed.

Company websites are also a source of information, as they list clients and partners. Additionally, data on employees paying into the Employees’ Provident Fund (EPFO) can reveal the number of employees in a company.

In summary, the most important sources for gathering data include:

• BSE and NSE filings.
• The company’s website.
• The EPFO database.

What are the Red Flags to avoid while picking a stock?

1. Dubious Promoter Actions

• Promoters selling significant stakes or having a questionable track record are warning signs.
• Research their history online and look for news on past controversies.

2. Heavy Debt and Fundraising

• Companies overly reliant on debt or frequent fundraising are often risky.
• Instead, opt for businesses with robust cash positions and minimal liabilities.

3. Weak Client and Partner Networks

• Check a company’s website for client and partner details. Reputable associations can indicate credibility.
• Verify employee data through resources like the EPFO database for additional insights.

Along with picking the right stock, it is important to balance technical and fundamental analysis for stock picking. 

Balancing Technical and Fundamental Analysis

Fundamental analysis evaluates a company’s financial health by examining factors like revenue, profits, and growth potential. On the other hand, technical analysis focuses on stock price movements and patterns using charts and indicators.

By combining both, investors can make more informed decisions—fundamentals help identify strong companies, while technicals help time entry and exit points. For instance, a strong fundamental company showing a technical breakout could signal an ideal buying opportunity.

Now, you know how to select the right stock for your portfolio, but how to decide when to sell a stock. 

When to Sell a Stock?

Selling a stock is a critical decision influenced by specific circumstances.

1. Stagnant Growth: If a stock shows prolonged underperformance with little to no revenue or profit growth, it may indicate a lack of innovation or declining market competitiveness. Holding such stocks could hinder your portfolio’s growth.
2. Better Opportunities: Sometimes, selling is about reallocating funds to higher-potential investments. This includes emerging trends, undervalued stocks, or sectors better aligned with your goals.
3. Achieving Your Target Price: If the stock reaches your predetermined target price, it may be time to sell and lock in profits. Setting a realistic target price when buying a stock helps remove emotions from the decision-making process, allowing you to stay focused on your financial goals.

Ultimately, monitor performance regularly, assess market trends, and ensure that selling aligns with your financial objectives and risk tolerance for optimal portfolio management.

Building a Resilient Portfolio

1. Diversification is Key

Spread your investments across sectors such as IT, banking, and pharmaceuticals to mitigate risks.

2. Long-Term Focus

Avoid the trap of trying to time the market. Instead, concentrate on staying invested through market cycles.

3. Emotion Management

• Greed leads to chasing overpriced stocks, while fear causes panic selling during downturns.
• A disciplined, goal-oriented approach can help navigate market volatility effectively.
• Review your portfolio quarterly to check for imbalances 

Final Takeaway

The stock market isn’t just about picking the right stocks; it’s about staying disciplined, learning continuously, and maintaining patience. Start small, diversify, and focus on the long term. The journey of wealth creation is a marathon, not a sprint.

By combining sound financial analysis with emotional resilience, you can unlock the immense potential of the stock market and achieve your financial goals. 

Watch the detailed video to learn more