HOW TO PICK BEST STOCKS FOR INVESTMENT – KNOW BEFORE INVESTING
In today’s scenario everyone wants to be the richest person in the stock market but to be successful in the stock market you need to understand HOW TO PICK BEST STOCKS FOR INVESTMENT – KNOW BEFORE INVESTING how you will earn good rewards in the stock market. Good research is very important for investing in a company.
There is a wide range of stocks available in the stock market for investment and finding the best stock that gives good return on investment is also a challenging task for everyone. And here we are mentioning some key metrics to find out the good stock :-
In addition, it is often challenging to look at financial statements to determine which companies have solid revenue and profit growth and favourable debt conditions. If you are wondering how to pick best stocks for investment or how to select stocks, then this blog is just for you!
While the investment amount, time horizon and risk appetite vary for each investor, there are some general pointers that can help all investors.
1.Do your research and understand the business. This includes fundamental and technical analysis to determine a fair value for the stock, as well as understanding the business prospects to ensure it aligns with your strategy and goals.
2.Use a mix of quantitative and qualitative stock analysis to create your portfolio. By doing this you can create an approach that works for you.
3.Avoid emotions when making investment decisions. Don’t buy a stock just because there’s a lot of buzz about it – and don’t rush into any buy or sell decisions.
4.Make sure you spread your risk by diversifying your portfolio
# Quantitative Analysis
In this process, the investor finds out the “true value” of a company by examining its financial data. Whenever you are considering investing in a business, be sure to look at its financial statements.
If a company does not meet your personal investment criteria and does not seem promising, you should not look at its financial statements. You can do this by looking at the balance sheet, income statement and cash flow statement for the business.
# Qualitative Analysis
This focuses less on numbers and more on the characteristics of a great company that would attract an investor to invest in it. We will use an example to help you understand this:
When I think of the name ‘Apple’ most people think of the company rather than the fruit. This is a great example of incredible brand recognition that is here to stay. Being a household brand name brings a lot of trust from consumers.
So, when a new product is introduced, people are more likely to try it out, especially if they are innovative or unique.
Take a look at these fundamental ratios before investing :-
1. Price to Earning Ratio (P/E) :- The P/E ratio is calculated by dividing the market value per share by the company’s earnings per share. A high P/E ratio can mean that the stock is probably overpriced. A low P/E ratio can indicate that the current stock price is low relative to earnings.
2. Debt to equity Ratio :- The debt-to-equity ratio (D/E ratio) shows how much debt a company has compared to its assets. It is calculated by dividing a company’s total debt by its total shareholder equity. Note that a higher debt-to-equity ratio indicates that a company may have a more difficult time covering its liabilitie.
3.Earning per Share (EPS) :- Earnings per share (EPS) is a company’s net income subtracted from preferred dividends and then divided by the number of its common shares outstanding. EPS indicates how much money a company earns for each share of its stock and is a widely used metric for estimating corporate value.
4. Price to Book Value Ratio (P/B) :- The price to book ratio (P/B) is calculated by dividing a company’s market capitalization by the book value of equity as of the latest reporting period. Or, alternatively, the P/B ratio can also be calculated by dividing the company’s latest closing share price by the most recent book value per share.
5. Return on Capital Employed (ROCE) :- It is a financial ratio used to measure a company’s profitability and the efficiency with which it uses its capital. Simply put, it measures how good a business is at generating profits from capital.
6. Return on Equity (ROE) :- Return on equity (ROE) is a measure of a company’s net income divided by its shareholders’ equity. ROE is a measure of a corporation’s profitability and how efficiently it generates profits. The higher the ROE, the better a company is at converting its equity financing into profits.
7. Industry P/E :- The P/E ratio is calculated by dividing a company’s stock price by its earnings per share (EPS). This ratio shows how much investors are willing to pay for each dollar of earnings a company generates.
8. Dividend Yeild :- The dividend yield is a financial ratio that shows how much a company pays out in dividends each year relative to its stock price.
Determining the managerial efficiency
When individuals choose stocks to buy, it helps if they do a thorough research about a company’s management and assess its efficiency. A potential investor can get a better understanding if he attends managerial meetings (held every quarter to discuss the company’s quarterly performance).
Alternatively, investors can also attend the annual general meeting (AGM) held every year to answer shareholders’ queries.
Here are some points to note on the efficiency of management-
Management Tenure
The stability of a company can be determined based on the length of tenure of its management. Long tenure of top management usually indicates steady growth and stability.
Shareholding Pattern
All listed companies release this information every quarter as mandated by market regulator SEBI. Now, as an investor you can check the holdings of various shareholders including the promoter, institutions, government and even retail investors.
Generally, a company with high promoter holding means that the promoter is invested in the company, which may indicate the stability of the company. This is also the case with institutional investors.
However, promoters do not need to hold a higher stake in their company at all times. There are companies that perform well even with lower promoter participation. That said, you can still note changes in shareholding to make informed decisions on your investments.
Note:- The information provided on this blog is for educational and informational purposes only, does not constitute a suggestion to invest, ask your financial advisor or do your own research before investing in any instrument. Because there is risk involved in the market.