You must have heard stories of becoming millionaires and failures as well in the stock market. Different traders have different strategies to trade. But the common thing is the need for good stocks. The primary skill required to invest and trade in the stock market is selecting the right stocks and the right Demat account. Every investment decision must be research-backed by reliable and strong sources.
Factors help to choose the right stock
There are a lot of factors that you need to consider while choosing shares for investment and how to open a Demat account. Let’s discuss these factors.
Estimated Growth Rate
In the stock market, millions of investors estimate growth rates constantly as stocks fluctuate constantly. It is necessary to get the right growth inputs so that you can find out what the company has the potential to earn in the future. Maybe there is no exact figure of growth rate but you can have an estimated rate.
What will help you:
Periodic financial results of the company
Periodic results of competitive companies.
You need to check the company’s fundamentals. It will tell you how the company has performed in the past. So, look at –
Dividend: It should be increasing for the last 5 years
Earnings Per Share (EPS): It should be Increasing in the last 5 years.
Price to Earnings Ratio (P/E): It should be low as compared to other companies in the same industry.
Debt to Equity Ratio: < 1. Prefer debt<0.5 or 0.
Return on Equity (ROE): > 20%
Current Ratio: > 1
Understand the products/services
Always invest in the companies that you understand. Learn about the products and services first to understand the company. Do not invest in ‘XYZ Pharma company’ without knowing what medicines they produce.
Life of the business
Find a company with a long life. Research that will people still want to use the product/service in the next 15-20 years. Such companies offer the power of compounding.
Low-cost longer competitive advantage
Mr. Warren Buffet suggests investing in the companies with ‘MOAT. Generally, a Moat is a deep boundary intended as a defense against attack. In the stock market, Moat refers to a company’s ability to maintain competitive advantages so that it can protect its long-term profits.
You need to identify the company’s main competitors. Compare their profits. If you find a huge difference between the companies’ revenues, the company has a wide moat. Apple, Colgate, Cadbury, Tata Motors are considered to have a wide moat and their switching cost is high.
Find the unique selling point
Find out why people are preferring a product. Let’s take an example in the automobile sector. Most of the buyers will prefer a company with the highest rated service provider.
Efficient and qualified management
Good management prospers a company. Research carefully about the management of a company before investing.
- Go through the Vision, Mission, and Values of a company and their strategies to achieve it.
- A long tenor of the top management of the company is a good sign of a healthy company.
- Check its promoter’s buying and share buybacks to check the company’s performance.
Good management always tries to maintain the transparency of its company. Just as the management announces the good quarterly and annual results of the company, in the same way, it should come forward to explain the reasons for bad results to its shareholders.
The Bottom Line
What to do:
- In the present scenario, invest in any of these industries IT/FMCG/Pharma as the product/services are in more demand now.
- Invest in mid-cap companies as they have the potential to be large-cap companies that can give the best returns.
Not to do:
- Avoid a company which has a weak base.
- Avoid business you do not understand.
- Avoid companies with big debts.