The fundamental way of selecting stocks

It is a common belief that people only lose money in the stock markets. However, this is a misconception, as people lose their money in stock trading due to poor financial decisions and a lack of proper research.

Sep 23, 2018 03:09 IST India Infoline News Service

When looking for avenues to accumulate wealth, stock investments are a preferred option. The market offers many types of stocks for investors with different financial goals. Yet, selecting a stock entails considering various factors.

It is a common belief that people only lose money in the stock markets. However, this is a misconception, as people lose their money in stock trading due to poor financial decisions and a lack of proper research.

Here are some tips to select stocks that generate wealth

  1. Know your appetite

Every investor has different financial goals and risk appetite. The purpose of the investment has to be clear when picking stocks. For those looking to increase their corpus, one can invest in companies that are in their growing phase. If they want a steady payment of dividends and capital appreciation, then they can invest in blue-chip stocks. Determining the financial goal is important when selecting a stock.

  1. Learn about the company fundamentals

Learn about the company financials and its past performances before investing. The financial statements of the company indicate its growth rate. Regular payment of dividends, favorable debt ratio, current ratio, etc., are some of the factors that will determine the company’s profitability over the years. If the price of the stock has been on a steady uptrend over the past few years, investing in that stock is a good option.

  1. Products or services of the company

When selecting a particular company’s stock, the investor has to know about the company’s products and its uses. The investor has to choose stocks that have the potential to earn in the future. Once the investor has a clear understanding of the stock, the decision to buy or sell can be taken easily. One should not invest in a company’s stock without knowing about its products.

  1. Product’s future

Before investing, the investor has to ask themselves the following questions:

·         Will the company’s product still in be in use even after a period of 20 or 25 years?
·         Does the product have the potential to earn a steady income?
·         What is the Unique Selling Point (USP) of the product?

These questions will help the investor to determine the life of the company. A company with a long life has a massive potential for growth. It also enjoys the power of compounding in the long run.

  1. MOAT

The term “Moat” was introduced by Warren Buffet, a veteran investor who is world-renowned for his investment acumen. The moat is a ditch of water that surrounds a palace or a fort. It works as a defense against attackers. The term ‘moat’ applies to companies that have a strong market following and is undeterred by competition. Some of the examples of Moat in the Indian stock market are Tata Motors, Cadbury, Asian Paints, and so on.

  1. Spread your investment

Diversifying the investment portfolio is a prudent action when investing in stocks. Investing in mid-cap and large-cap companies can give a steady payment of dividend. Investing a portion in small-cap companies can assist in higher capital appreciation as small-cap companies have the potential to make it big in the future.

  1. Transparency

Invest in companies that provide a fair and transparent view of their current situation. The management of the company should provide transparent reports of their quarterly and annual meetings and earnings. They should also apprise the investors in case of any problems. A strong and efficient management is essential for a company’s profitable growth.

Conclusion

There is no set way or formula when it comes to picking stocks. These basic tips can help investors choose stocks that can be profitable in the long run. It is sensible to select a stock that fits within the investor’s investment strategy, investment duration, risk appetite, and other factors. 

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