There are various aspects to be understood before picking stocks of companies. It is not a layman’s game to randomly select any stock and start investing. Investment in stocks requires an understanding of various factors that can help an investor to attain his financial goals.
Choosing the right stock at the right time can significantly affect your portfolio returns and this art is learned over a period of time and experience. You must also know how you can compare the stocks of the same sector and stocks of different sectors to ascertain where you should make an investment.
How to select stocks to invest in?
1. Gain Knowledge about the company
It is vital to investigate the core business of the company and learn about the products and services offered by the company. For e.g. do not buy the stock of “XYZ Technologies” just because the technology sector is faring well. You must do thorough research; understand the management, sales, future projections, and other details of the company before investing in its stock.
2. Know the fundamental ratios of the company
Before making any investment, there are certain ratios that will help you to understand the financial health of the company. These ratios include Earnings per Share (EPS), Return on Capital Employed (ROCE), Price to Earnings Ratio (PE) Current Ratio, Debt to Equity Ratio, Return on Equity, Price to Sales Ratio among others that will help you to filter the best companies across all sectors.
3. Compare the Competitors
Know what is the unique selling point of the company and what is the company doing that the competitors are not. Every company has a number of Indian and global competitors. Study their financial statements, latest happenings and do research on their past performances. You can compare the most recent earnings of the competitor, earnings, growth rate, volatility, management and other aspects. Based on this information, you must decide which stock you should invest in.
4. Know the Company’s management
Good and efficient management is highly essential to a company as it decides the new heights that the company will reach in the future years. You must know company’s vision and mission, the length and tenure of its management, transparency, and expertise brought in by the management, etc. and other factors related to the management of the company.
5. Dividend distribution by the company
Regular dividend payment reflects stability and it also shows how consistent the company is regarding paying dividends over the years. However, this must be studied carefully. The high dividend may also mean that the company is not investing enough in itself and a low dividend may also mean that the company is saving for its immediate cash expenses.
To sum it up, the aforesaid key points must be studied well to pick stocks and decide the companies that you wish to invest in.
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