Beginner's Guide to Selecting Stocks
Investing is a
calculated and informed decision an investor takes to maximize his wealth.
However, if you are a novice or a beginner, you should be cautious while
investing. There are a number of ways through which you can reduce the risk of
loss.
As a beginner,
following pointers should be kept in mind while investing in stocks.
Set your investment
goals
Every individual or
investor is different and has a respective goal. Some want to play big and
would like to reap huge returns while others may invest for a desired event
like marriage, buying a house, besides other reasons. Others may trade for
day-to-day bills. Thus, it is important to know the ultimate aim of investing.
Investing can be
for the purpose of income or growth. Investing in blue chip companies where the
price of stock is high is purely an income investment where the dependency is
on the dividend earned through the same. While growth strategy, is where the
investment in stocks is expected to shoot up, thereby yielding high returns.
Here, you see a high potential in company's growth.
Informed investment
To be an informed
investor, an individual should be aware of the basics, the trends, and the news
which is formulating the dynamics of the investing game.
It is advisable to
know important ratios, which would come handy in performing a comparative stock
analysis. Some important ratios given below:
• Price to earnings
(P/E) ratio
P/E ratio is the
ratio which gives the measure of a company's earnings relative to its current
share price. For example, if the current share price of a company is 50 and its
earnings per share during the last 12 months were 2. In this case the P/E ratio
is 50/2 that is 25.
This ratio can be
compared to the P/E of industry and P/E of the company during last year. If the
P/E of company is greater than industry P/E it's a good buy, even though if
it's less in comparison to its historical value. The ratio is an indicator of
stable company and the futuristic growth. However, it is important to
understand the overvalued P/E which could be because of the increased debt or
future earnings which is very subjective.
• Debt to Equity
(D/E) ratio
D/E ratio indicates
the promoter's capital or equity in the company. Generally, lower value is
considered better. However, it is also an indication of the expansion via fund
raising.
An added
perspective to the higher ratio is the case where cost of capital raised is
less than the returns the company is reaping. In this case, the investment by
an investor is justifiable as the company is on the track of expansion and is
utilizing the raised capital for profit making.
• Operating Profit
Margin (OPM)
Dividing operating
margin by net sales gives the figure which indicates the operation efficiency
of an organization. If OPM is rising over a period of time, it is a good
indicator. It shows that the company is efficiently converting its raw material
in finished goods.
• Return on Equity
(ROE)
A company invests
to earn returns. The ratio Net Income to Shareholders Equity is an indicator of
profitability. It indicates that the investments are reaping returns. An Ideal
ROE is ranging between 15-20%.
Sector specific
investment
Take a thorough
understanding of the industry you are interested in. Visit meet-ups, seminars,
and talks to gain the understanding of the industry. This would provide for an
understanding of the sector and also the direction in which the specific sector
is moving, what are the changes which the sector is experiencing and how would
the sector evolve in the near future. This would help in selecting the right
stock on the basis of the investment goal set.
Opt for the best
pick
After gaining the
basic knowledge about the sector and setting up your investment goals, you are
now equipped to start picking the stocks.
Perform a
comparative analysis between the stocks basis the financial and sector
knowledge, which you have gathered. Once confident, start your investment in
stocks.
If you are still
not confident, start by picking up low-cost index stocks in your desired
sector. Gradually, build your portfolio and start diversifying the stocks. This
would leverage against the losses and abrupt changes in the specific sector.
The above are some
of the ways through which you can start investing in stocks in the share
market. Keep in mind that it's your hard-earned money so be wise and make an
informed decision based on your risk appetite.
TradeIndia Research is India's one of the Best Stock Advisory and SEBI Registered Company in Indore who caters &
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Forex Market. We give the most reliable advices for letting your money to flow
in right direction. We understand the uncertainty & every moves of stock
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by that they are able to take advantage of each of their trade & make more
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