Seven Rules to make money

The Repo rate cut by RBI was received by much enthusiasm in the stock market yesterday. It was expected given the low rate of inflation and the need to kick start the economy to realise the vision of the current ruling party. With the sensex touching 28000, it may not be the best time to invest, but it keeps fluctuating.

For those of you who don't know much about stock market and the basics of economy and investment, i have started this blog to bring out some simple and easy to understand facts , which can help a novice or an expert immensely while investing be it stock market or other investment options.

When we talk of stock market or shares, we first need to understand what does a share of a company mean! A share of a company gives you an ownership of that company in the proportion of your share. Its also called equity. That means if you own 100 shares of Reliance Industries, you are an owner of RIL. you have the voting privileges and you will be invited in the annual general meeting of the company.

So how does that ownership transcend into income. Whatever the company earns, equitable proportion of its earnings belong to you. A portion of it is distributed as divident and the remaining is reinvested in the company for better results in future. Now not going further into the intricacies of share i will use a different method of enlightening  you about the stock market. Every week i will tell you one golden rule of investing, of what i look in a stock before buying and then pick one stock which i feel is good in that criterion but also passes other tests , which i will discuss in next section, There are total 7 simple rules. FYI i made a cool 50 percent return last year on my investments. Those of you who didn't understand that if you put your money in a fixed deposit which is by far the investment with best assured return, you get around 8 percent return. If you can manage a 50 percent return for 10 years, a sum of Rs 1 lakh can transform into Rs 60 lakh. Off course its an exception than the rule.

So starting with Rule no. 1, perhaps the simplest but the most important is a share's Book Value.

What is Book Value. Lets  say a company has total valuation including land, machinery etc of Rs 100 Crore. and there are 1 crore shares in total. so the book value would be rs 100. This is different from the price at which the share is selling, that is market value.

Now would you want to buy a thing more than what its actually worthy of! Sadly in shares its true. If people in investment community feel that a company has good future prospects, that company will have more demand and thus the price of that company and its shares go up.
Now what is that extra value between market price and book value. That is the goodwill value of that company. and sometimes market price is less than book value. It maybe because the company is embroiled in a legal scandal or is following wrong practices or the product it makes has gone out of use but it can also mean that you are getting something cheaper than it actually is, just because people in the investment community are not showing much interest, These are the shares that you got to hunt for, because over a period of time people will realize that its a good stock to invest in and it gradually takes up. That is why companies like Tata Consultancy Service which don't have much land or machinery sells at much higher price than its book value.

So here is the thing ,look at a share and see its market price and book value, under no circumstance should you buy anything more than 1.5 times its book value. Make a list of shares trading at below the book value. All this data is available on different sites like moneycontrol.

I am not saying that all companies trading at below the book value are good, but how I trade is that i have a set of 7 Golden rules and i only buy a company if it passes all the criteria. So these rules are more of ruling out criteria of what not to buy. All the companies that are not ruled out because of these rules are good investment options.

So Rule 1: Never buy a share at a market price more than 1.5 times its Book value.

Now go and check out Gitanjali Gems, which is my pick of the week. Look at its book value and market price. Its a company with good prospects. Did you hear about India signing an MoU with Russian government regarding direct import of rough diamonds thus bypassing middle east as middlemen. so much so for increasing the profit margin of Gitanjali Gems! Gitanjali Gems is trading at Rs 53.20 at NSE today.Watch out in next 3-4 months.