Planning to invest for a long term?

Statistics show that a significant chunk of retail investors, who are not investment professionals, lose money every year. There are some reasons for this; however, one major reason is insufficient knowledge.

Apr 07, 2018 07:04 IST India Infoline News Service

Investing is easy, but investing successfully is difficult. Statistics show that a significant chunk of retail investors, who are not investment professionals, lose money every year. There are some reasons for this; however, one major reason is insufficient knowledge about the company or sector they are investing in.

Here are two methods to interpret and analyze shares before investing in them.
 
Qualitative Analysis
 
What is the business about
 
In the book 'Real Money', the author advises investors never to purchase a stock unless they know how the company makes money. One needs to know about its products, services, areas of operations, and position in the industry.
 
Leadership

Does the CEO steer the company in the right direction? If so, what are the contributing factors? How will the company perform if the CEO leaves? Before investing, find out the structure of the company's Board of Directors and its governance practices.
 
Business model

A company uses its business model to maximize its profits. Analyze how this business model will work in situations such as a recession or an economic boom.
 
Competitive advantage

Competitive advantage is when a firm has an edge over its competitors through better products, patents, brand power, technology, or operating efficiencies. 

Company’s track record

There’s a risk if the business is new. Make sure that the company you are investing in has a solid, steady growth.
 
Quantitative Analysis
 
Financial performance

This aspect deals with investments the company has made, opportunities it had/has to make money, assets, liabilities, and debts.
 
Business costs

This deals with the company’s operating statements and cost of running. It also makes a comparison of the sales and costs of the enterprise.
 
Risk factors

This part deals with the risks the company faces, and the potential to address those risks. These inferences are made through the company's Management Discussion and Analysis Report.
 
Dividend history

This deals with a company’s track record, dividend history, and growth potential.
 
Revenue

One should analyze the company’s revenue to see if they are consistent, if not rising.
 
Net income

This part assesses net income growth from year-to-year. 
 
Profit margin

A company’s profit margin is necessary to assess its steadiness, irrespective of economic conditions. Greater the margins, greater the product domination that a company has.
 
Debt to equity ratio

The debt-to-equity ratio helps one discover a company's debt holds compared to the number of equity shareholders in the company. The ideal is considered to be 1:1.
 
Price to earnings (P/E) ratio

One should look for a company with a P/E ratio that is on par or lower than the overall market's P/E ratio and the company's peers in the industry. Lower P/E ratio is a signal that the corporation's stock is trading at a fair price or even at a bargain.
 
The chart

CNBC investors say if an investment's chart begins at the lower left and goes to the upper right, it is a good thing. If the graph is on the downturn, one need not invest their energy to understand why.

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