Given the diverse range of stocks available in the market, it is challenging to select shares to buy that suit one’s investment needs.
Moreover, it is often challenging to skim through financial statements to identify which companies have solid revenue and profits growth and a favourable debt position. If you’re wondering about How to Pick Stocks or How to Choose Stocks, this blog is just for you!
That said, there are a few factors that prospective investors can consider while selecting stocks for investment.
While the investment amount, time horizon, and risk appetite vary with each investor, there are a few common pointers that can help all investors. For you to find good stocks to buy or invest in, you need to check these below-mentioned points. These are some things to know before investing in stocks:
Investment goals vary among different investors. For instance, older investors tend to be interested in capital preservation as their retirement years approach. On the other hand, when young investors select shares to buy, they usually aim to increase their returns and grow their portfolios over the years.
Therefore, it can be said that one’s goals dictate which stocks to buy:
Once you have determined what kind of investment goals you have in mind, you can narrow down on the stocks-to-invest. In this respect, one of the key factors to look into is whether a business has a sustainable and unique edge over competitors, popularly known as a moat.
Additionally, when individuals select shares to buy, it is important to ascertain the durability of this competitive advantage. That is, whether the company will continue to have its edge over its competitors for years to come.
Products and services with a sustainable and wide moat tend to be the ones delivering rewards to investors. Furthermore, one can weigh in factors such as scale, unique brands, switching costs, network, and intellectual property to conduct a thorough competitor analysis.
Businesses with a High Return on Capital make a lot out of little, while those with a Low Return on Capital make a little out of a lot. As a result, if a stock has a High Return on Capital, it probably has a strong moat and will provide you with a good return on your investment.
As a general rule, you should seek out stocks that have a High Return on Capital.
Prior to purchasing a stock, you should take the company's profitability into account. A metric called Return on Capital is the most effective way to gauge profitability.
Return on Capital, which is calculated as a percentage, is equal to Net Income minus Invested Capital. You can either research the financial statements and make your own calculations or simply obtain them directly from online data sources that offer them.
In this process, an investor examines a company's financial data to ascertain its "true value." Whenever you're considering investing in a business, be sure to check out its financials. You shouldn't look into a company's finances if they don't meet your personal investing criteria and don't look promising. You can do this by looking at the balance sheet, income statement, and cash flow statement for the business.
This puts less emphasis on the numbers and more on the characteristics of a great company that would entice an investor to invest in it. We'll use an illustration to help you understand this:
Most people think of the company rather than the fruit when I mention the name ‘Apple’. This is a fantastic illustration of incredible brand recognition that is here to stay. There is a lot of consumer trust that comes with having a household brand name.
People are therefore much more likely to try out new products when they are introduced, especially if they are innovative or unique.
There are several ways to assess a stock’s current price and its financial and fundamental performance. Here are a few of them:
Do note that, the above-mentioned ratios are a few of the metrics with which one can assess a company, however, these are not the only metrics to consider for an investment decision.
An investment decision ideally should be backed by thorough research.
When individuals select shares to buy, it helps if they conduct thorough research about a company’s management and gauge its efficiency. The potential investor can understand better if she/he attends managerial meetings (conducted every quarter to discuss the quarterly performance of the company).
Alternatively, investors can also attend the annual general meeting (AGM) conducted every year to answer questions of shareholders.
Here are a few pointers to note on the management’s efficiency.
One can determine a company’s stability based on the length of tenure of its management. The long tenure of top management usually indicates steady growth and consistency.
All the listed companies release this information every quarter as per SEBI, the market regulator, mandate. Now, you as an investor can check the holdings of different shareholders including promoters, institutions, Government, and even retail investors.
Generally, a company with a higher promoter holding means that the promoter is invested in the company, which could indicate the stability of the company. Similar is the case with institutional investors.
However, promoters are not required to have a higher stake in their company all the time. There are companies that do well with less promoter involvement as well. That said, you can still note the changes of shareholding to take a call on your investment.
Thorough research is always necessary. However, investing for the long term, taking advantage of dividends, and finding stocks with a track record of success are important ways to protect your assets. Risky and aggressive trading tactics should be minimized or avoided unless you have the knowledge.
Disclaimer: The views expressed in this post are that of the author and not those of Groww.