Finding a good Stock for investment is an art. If you are here to know the formula to multiply your money quickly and expecting magic which will make you millionaire then you are at wrong place. Yes! There is no formula which works in Share market and can give you guaranteed big profit. But it’s practice and awareness which can make difference in avoiding risks and minimising losses.
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“People with shortcut earning mentality always choose intraday trading and ruin their hard earned money. You will find many news channels and websites showing tricks to make huge money in intraday trading but in reality 90% people only loose. My advice, go for investment rather than gambling.”
As I said earlier in this article, investing in stocks is an art and it improves with your awareness, experience, discipline and patience. When you buy a stock of any company then you become partner with that company. When you want to become a partner in any business then what do you look into? Probably future prospect, business plan, company’s goal etc. But when we buy stock, we just buy price because someone told us or saw in news or read in newspapers but most of the time we don’t actually look into company’s profile and at the end we make loss.
As we know that investment in stock could be a good choice in order to earn big returns but the question is, where to invest? how to pick good stock? Which stock will give good return? And to answer these questions I've tried to explain some smart ways which could be followed in order to identify the stocks for investment and I can assure that by following below ways with discipline will help in giving good returns.
Please keep in mind that there are two types of investors, Risk Taker and Safe Investor and my points will be more helpful and relevant for Safe Investors.
1. Look for the straight forward business model:
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Buy the stock which you know i.e. always invest in company which has very straight forward business and its presence can be seen everywhere. Chances of such company’s growth is always high and same will impact your investment growth.
2. Choose stocks which are best in its peer:
Choose company which has good brand value i.e. companies that have tremendously-established brands or that have extremely strong emerging brands. We also need to consider the sectors because in some sectors, the concept of “brand” means less than in other areas of the market. Branding, for example, means less in the mining sector than it does in retail. Overall, it is best to stick with preeminent, ubiquitous, and highly-admired brands as well as underweight sectors where these stocks are hard to find or do not exist. When investing in less “brand conscious” sectors, however, stick with the “best in breed” companies and follow the other parts of the strategy highlighted here.
3. Choose companies with best past performance:
companies with consistent growth performance are always good choice because in maximum cases such companies tend to follow same trend in future. I didn’t say in all cases because it’s not necessary that which never happened in past will not happen in future. But, if you invest in company which is showing continuous growth since last ten years then the chances of continuing the trend is very high and one can rely on that. I have seen people investing in companies which was draining the investor’s money in past but showing continuous growth or upward movement since 2 years and after investment trend took downward movement again. Therefore if you are seeing the past performance then “Longer the Time Period Higher is the Accuracy”.
4. Portfolio diversification:
It means that, don’t invest in only one stock or stock in same sector especially when you are new in stock market. Try to diversify your portfolio buy picking stocks from other sectors. Remember even you are buying stocks from all sectors then also try to pick best stocks from that sector. Don’t buy the price buy the future because companies with strong growth rate tend to follow the growth. If possible, try to invest in mutual fund also along with the stocks for safe investment.
5. Look for the Break out or Pullback opportunity:
Look for this pattern with emerging brand stocks and try to buy the more established companies as cheap as possible to hold onto for the long haul. Sometime such stocks change the future of the buyer because some pullback or breakout can multiply your investment in 10 times in 1 or 2 years. But finding such stocks are not that easy because it needs analysis, research and most importantly patience. I didn’t say it’s not possible, hence don’t feel bad start your own analysis and make the difference.
6. Basic fundamental study:
You might have seen people on business TV channels talking in very technical term which we find difficult to understand. Understanding of some basic technical terms related to share market or stock market helps to choose the profitable stocks and also to understand the company’s fundamental. I’ll share some of the fundamental terms which could be studied and applied to select best stock for investment.
1. EPS : Earnings per share (EPS) is the portion of a company's profit allocated to each outstanding share of common stock. Earnings per share serves as an indicator of a company's profitability. Growing EPS value represents company’s profit or growth.
2. Dividend: Companies share some part of the profit with its investors and this profit sharing value called as dividend. Dividend value is declared per share (e.g. if you are holding 100 shares of any company and it declares dividend of $1 then you will get $100 as dividend).Companies declares dividend annually or twice a year depends on company management decision and paying dividend is not compulsory for the company. It is advisable to invest in stocks which has consistent healthy dividend paying history because it indicates company's consistent growth and you may like to know that the dividend money is totally tax free in India and it’s beneficial for long term investment.
3.Debt: Companies take debt from bank or from any industrial financing organisations to run their business and in return to that company pays interest periodically. It is advisable to avoid companies with higher debt value because such companies tend to go in loss when market is not favourable & so as the investors. Always try to pick stocks with no or less debt value because thy have minimum impact of changing market scenario and such stocks has shown consistent growth for longer time.
4. P/E ratio: It is common practice for investors to use the price-to-earnings ratio (P/E ratio or price multiple) to determine if a company's stock price is over or undervalued. Companies with a high P/E ratio are typically growth stocks. However, their relatively high multiples do not necessarily mean their stocks are overpriced and not good buys for the long term.
7. Look for the Future prospects:
Understanding future prospects is important as part of financials. You can identify the factors that may influence the future performance of a stock. For instance, good monsoons should help stocks in the fertilizer sector. Future prospects of the company can be enhanced or marred by policy decision. For instance, opening up for FDI can have a positive influence in anticipation of increased capital inflows. However, factors like technology changes can have either a positive or adverse impact. Some of the stocks have been badly affected due to changes in technology and non-adaptation to market realities.
"Last but not the least, don’t forget to sell the stocks on time because it is also a skill which comes with experience."
Please remember, market doesn’t guarantee profits so do my views in this article but one can learn and make the difference. Remember, learning is the key especially from the mistakes, no matter from yours or other’s mistake.
If you have experienced any other way or you want to share your views then feel free to comment and spread the knowledge. And yes! This is our goal.
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