Dear Friends,

Yesterday, I helped the son of my former colleague to open a Demat account to make him involve in the stock markets.

He asked me for some advice regarding the stock market.

He wanted to know how to identify the right companies to invest in, whereby given that there are thousands of companies in India.

While there are indeed thousands of companies in India, only 2,720 are listed on the National Stock Exchange. 

You can further deep-dive with the categorization them into three major groups: Large-cap, Mid-cap and Small-cap.

Among these, only 100 companies—those with a market capitalization of over ₹20,000 crore—fall under the Nifty Large-cap category.

Another 150 companies will fall under Nifty Mid-cap and 250 companies are in Nifty Small-cap. Now, you are left with a pool of just 500 companies.

From this list, examine the CAGR (Compound Annual Growth Rate) over the past five years, check for dividend payouts, assess debt levels and look at the P/E ratio.

After applying these essential  filters, you will likely be left with only about fifty companies.

I advised him to select fifteen stocks from these fifty that he felt quite comfortable with and to invest in them consistently little by little, month after month—over a long-term horizon of fifteen to twenty years.

You can never catch fish if you simply stand on the shore, astonished by the vastness of the ocean.

You must step into the water to see your goal so clearly;

Only then can you determine where to make your net or drop your fishing line.

From the outside, it looks like a whooping 2,720 companies, but our actual target is just ten or fifteen of them.

Happy investing!