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How To Invest In Stock | Tips For Picking A Good Stock
The majority of us investors aspire to become wealthy rapidly by investing in the stock market. However, instead of making money on the stock market, the majority of people lose money.
One thing to keep in mind, friends: there is no shortcut to making money; you must work hard for it. To make money in the stock market, you must also put in a lot of effort.
The majority of individual investors in India’s stock market never consider how to choose a stock. The majority of the shares in this portfolio were purchased solely on the basis of Stock Tips.
Buying stocks only on the basis of a tip can result in a loss. Everyone will get wealthy from the stock market if shares are bought and sold solely on the basis of tips. That is why, while choosing a stock, you must have a thorough understanding of the stock market’s math.
Stocks are typically purchased in the stock market for two reasons:
- Investing (regular buying and selling of stocks)
- Making an investment (Investing in shares for long term)
Today, I’ll share some crucial investing tips with you, so you can pick the finest stock for your money. Which will enable you to determine for yourself which company’s shares to purchase?
In this article, we’ll go over how to pick the ideal stock for you.
Pick A Stock To Invest Or How To Invest In Stock
Here are some stock selection tips that will undoubtedly assist you in selecting your first stock and continuing on your adventure:-
1. Determine Which Sector Or Industry To Work In
The stock market has thousands of companies listed. It can be challenging to pick the best stocks from among them. First and foremost, you must determine the industry in which you believe there is room for expansion. Banking, pharmaceuticals, and fast-moving consumer goods (FMCG) are just a few examples.
Companies that bring outdated products with the changing times should be ignored. The typewriter and DVD player manufacturers, for example, have no future. Always go for an industry or firm that has the potential to expand in the future. To do so, you must first comprehend the company’s operations. Consider the company’s products: will customers continue to use them in 15 to 20 years?
2. Gain A Thorough Understanding Of The Company’s Operations
Many investors buy shares of any company based on stock recommendations without giving it much thought. They have no idea what the company’s actual business is. Purchasing stock in a firm entails putting your money into that company.
As a result, you should be aware of what the corporation is doing with your funds. If you don’t fully comprehend the company’s operations, you won’t be able to comprehend the company’s work or product adjustments. As a result, anticipating the current and future situations of the firm may be difficult.
So always keep these points in mind:
- What business is the firm in?
- What products or services does the company offer?
- Who are the company’s target consumers?
3. Examine The Financial Information
Look at the financial statistics of the last 3 to 5 years of any stock that looks promising in the future. The balance sheet, income statement, cash flow, and financial ratio should all be included.
Balance Sheet or Financial Statement
- Look at Company Reserve and Surplus to check if there has been a drop in Company Reserve and Surplus in recent years. Increasing the company’s reserve and surplus is in the company’s best interests.
- Examine the company’s liability pattern. It is regarded correct if the liabilities are fewer.
- Determine the worth of the company’s fixed and current assets. Check to determine if their worth has dropped in the recent 3-5 years.
P&L Account Or Income Statement
- This displays sales data from the previous 3-5 years. Increased sales indicate that more consumers are interested in the company’s items.
- Take a look at the company’s net earnings. In Net Profit, you may see the details of the previous few years. Profits that continue to rise year after year are excellent for a company’s stock.
- A company’s cash flow is generated by three sorts of activity. 1. Investing 2. Operating 3. Obtaining funding
- A positive cash flow is required for the company’s seamless operation. As a result, double-check the cash flow figures from the previous several months.
- There should be some free cash flow in the company as well. The free cash flow left over after the company’s cash outflow is referred to as free cash flow. It will be more helpful to the company if it is higher.
4. Earnings Per Share (EPS)
EPS stands for “earnings per share,” which refers to how much each share of the company will receive from the company’s net profit. The profit of a corporation is directly proportional to the EPS. If the EPS is high, it indicates that the company is profitable. The EPS must be checked on a yearly or monthly basis.
Let’s look at an example to assist us grasp EPS – Example 1
Let’s say there’s a corporation called X Ltd. This corporation has 100 shares, of which you own one. If a firm earns $1,000 in a year, its EPS, or Earnings Per Share, is equal to $1,000 divided by 100 shares, or $10 per share.
It is preferable not to invest in stocks with a negative earnings per share (EPS).
5. Price to Earnings Ratio (PE Ratio)
The P/E ratio stands for Price to Earnings Ratio. Divide the EPS by the market price of one share of the company to get this ratio.
Market Price Per Share / EPS = P/E Ratio
In the preceding example, X Ltd. The company’s EPS is $10 per share. The company’s P/E Ratio will be if the current market price of this company is 200.
200 / 10 = 20 = P/E Ratio
This P/E Ratio of 20 indicates that you must pay 20 times in order to earn $10 per year. As a result, one share will cost you $200.
The company’s P/E Ratio is 20 in this case. How can you determine whether these shares are inexpensive or costly? For this, you’ll need to look at the P/E of the company’s industry or sector. Let’s pretend that X Ltd. is a company. We are a firm in the auto industry, and the auto industry’s P/E is now at 30. This suggests that X Ltd. is becoming more affordable when compared to the industry’s P/E.
Most novice investors view a stock with a low P/E ratio to be undervalued, while a stock with a high P/E ratio to be overvalued. This is partially correct as well. However, just because a company has a low P/E ratio does not mean it is inexpensive. A low P/E ratio can be caused by two factors. Either the stock is inexpensive or the company has no specific investor interest.
If a company’s stock’s P/E ratio is low, investigate why.
The current EPS, which is nothing more than past data, is used to calculate the P/E Ratio. So, if you can grasp a company’s future profitability by examining its fundamentals, you can master stock selecting.
P/E Ratio Limitations
Friends, The P/E Number is an important ratio in stock selection for any company, although it is not applicable everywhere. It also has some drawbacks.
- If a firm is young and hasn’t made a profit in a long time or is losing money, the P/E Ratio cannot be used to appraise it.
- The P/E Ratio is unimportant even in companies with fluctuating earnings.
6. Return on Equity (ROE) And Return on Capital Employed (ROCE)
Both of these ratios are considered to be the most crucial when choosing a company’s stock. The return on equity, or capital employed, is calculated using this ratio.
The Return on Equity Ratio (ROE) indicates how much money a company makes on its equity. How much money is made on the money invested by the company, if you comprehend in simple terms. Assume ABC Ltd. I have a 100-share capital and 100-share reserve. The company’s total equity was $200.
Assume that the company’s net profit for the year was $200. As a result, the Return on Equity (ROE) of ABC Ltd. Is:
[Net Profit / Total Equity] = Return on Equity 100 percent Equals 200 / 200
Return on Capital Employed (ROCE) The return on the company’s total invested money or investment is expressed as a ratio. Assume ABC Ltd. has a share capital of 100 dollars and reserves of 100 dollars. Aside from that, the company has taken out a 100-dollar loan. The company’s capital was $300 in this case. Assume the company’s EBIT (earnings before interest and taxes) was $250 this year. As a result, the ROCE of ABC Ltd. Is:
[EBIT/Capital Employed = ROCE] 83.33 percent = 250 / 300
If you’re seeking for a company with no debt, RoE is a good place to start. However, if a corporation has taken out a loan, the RoE in that company may provide false information. As a result, whenever a corporation has debt, you should constantly look at ROCE.
Companies having a ROE and ROCE of less than 10% can be ignored.
7. The Debts Of Company
Most crucial response to the question of “how to pick a stock?” is Debts or Loans. When buying stock in the stock market, it’s important to consider how much debt the company has. When a business has a lot of debt, it has to pay a lot of interest on the loan. If the corporation continues to pay interest, it will have a detrimental impact on its profitability.
As a result, the company in which you’re investing should have at least some debt. You might place a higher value on a debt-free corporation.
You may check the company’s Debt-Equity Ratio as an investor. It is deemed good if the debt-to-equity ratio is less than one. It is called an ideal ratio if this ratio is zero.
8. Income From Dividends
Companies that are profitable and in strong financial standing pay dividends to their shareholders. Along with a gain in share price, dividends might be considered regular income.
So, look at the company’s dividend history over the last five years to check if it pays dividends on a regular basis to its shareholders. Also look at the dividend trend to see if the company has given more dividends to its shareholders over time.
9. Information About The Company’s Management
Management is regarded as the heart and soul of any business. A good management team can help a company grow in the future, while ineffective management can bring a good company down. As a result, when choosing a stock, you must obtain accurate information on the company’s management.
Keep the following elements in mind when it comes to firm management:
- You learn about the management person’s qualifications, prior experience, and tenure.
- Go to the company’s website and look at the vision, purpose, and value statements. This will provide you with information on the company’s mission and long-term goals.
- Learn more about Share Buyback. If the promoters are buying back their own company’s shares from the public, it implies they believe in the company’s business plan and expect it to do well in the future.
10. Examine The Pattern Of Shareholding
The shareholding structure of a firm reveals who owns the company’s stock. You must determine how much of the share belongs to the promoters. The greater the number of shares held by the promoters, the better. If the promoters own a larger percentage of the company, it is assumed that they are confident in the company’s operations. Promoters must own at least 50% of the company. It is deemed better if it is greater. Promoters holding does not apply to private banks, it is worth emphasising (Pvt. Banks).
Please look into the status of your Pledge share or Pledge share. The company’s share pledge is missing somewhere. You can disregard a company’s shares if the company’s shares are lying.
Conclusion: How To Invest In Stock Or How To Pick A Share
If you choose a stock based on thorough study and analysis in the stock market, the chances of you losing money are slim. The steps outlined above will assist you in purchasing a decent stock. It’s possible that getting this information will be tough at first, but once you’ve done it a few times, it will become second nature.
The guru mantra for making money in the stock market is to buy cheap stocks and wait. The majority of stock market investors lose money as a result of their inability to stay patient.
Friends, from this article you have learnt about How to Invest in Stock or How to Pick a Share. Please share this information with your friends if you found it useful.
Disclaimer: This this article about How to Invest in Stock or How to Pick a Share is solely for the purpose of investor education and enlightenment. Before making any investment decision, kindly ensure to have all the requisite information or get guidance from a financial expert.