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What are hot stocks?

There is no such technical term as hot stocks. But stocks in which trading volume is currently high, and whose prices are rising can be considered as hot stocks in layman’s language. This means that they are stocks that are in high demand presently. Stocks in industries that are currently showing a boom are also sometimes considered as hot stocks. For example, many stocks in sectors such as IT & software services etc. are considered to be hot stocks.

Besides looking at the trading volume and direction of price movement, hot stocks can also be identified by looking at MACD signal and RSI indicator of the stock.

How to identify the hot stocks on a daily basis?

One can look at the top gainers at NSE on the day to identify the hot stocks of that day. For instance, on 2^nd August, 3 p.m. the top 3 gainers at NSE are Divi’s Lab, Nestle India and Hindustan Unilever. These three stocks are the hot stocks on 2^nd August. Daily hot stocks change on a daily basis.

How to identify the right stock to invest?

You should first ascertain whether you want to invest in a dividend paying stock or a high growth stock. Dividend paying stocks are those that regularly give dividends. You will get a regular stream of income, in the form of dividends, by investing in these stocks. A growth stock is one that is likely to see high capital appreciation in future. These are usually stocks of companies that are showing high growth rate. These companies usually do not pay dividends. If you want a dividend paying stock then look at stocks that regularly pay dividends. If you want to invest in a high growth stock, then look at stocks that are trading at a high P/E ratio. Stocks that are trading at a high P/E ratio are likely to be high growth stocks.

Before taking the decision regarding whether to invest in a stock or not, a bit of analysis of the industry of the company will help you in taking the right decision. The industry analysis can be done on the parameters of bargaining power of customers, bargaining power of suppliers, barriers to entry, threat of substitutes, and intensity of competitive rivalry in the industry. A stock is more likely to be a hot stock or good investment in the foreseeable future if the industry in which it operates has low bargaining power of customers, low bargaining power of suppliers, high barriers to entry, low threat of substitutes and low intensity of competitive rivalry.

Once you have identified the industry whose stocks are likely to perform well in the foreseeable future, you can pick the right stock by identifying the one that is relatively cheap when compared to its peers in the industry. You can use the parameters of P/E ratio or P/B ratio for identifying stocks that are relatively cheap. Stocks that are trading at a P/E ratio that is less than the industry average P/E ratio can be considered as cheap, and vice-versa.

What is the meaning of a multibagger stock?

A multibagger stock is one that gives return of 100% or more.

What is meant by Price-to-Earnings (P/E) ratio?

P/E ratio is the ratio of market price of a stock to its earnings per share.

What is a value stock?

A value stock is one that is trading at a relatively low P/E ratio. Such a stock also pays dividends. It also has a relatively low price to book value (P/B) ratio.

What is a growth stock?

A growth stock is one that is trading at a high P/E ratio. Markets expect that such stocks will show high growth in Earnings per share (EPS) in the foreseeable future. Therefore, the prices of these stocks are relatively high in comparison to their earnings per share.

What is value investing?

Value investing means buying stocks that are relatively cheap in valuation. There are various ways of identifying stocks that are trading cheap. One way is to look at the Price-to-Earnings (P/E) ratio of the stock. If the stock is trading at a low P/E ratio in comparison to its peers, in spite of good fundamentals, then it is a cheap stock. It will be good to buy it now. Its price is likely to increase in future. You can sell it when its price rises, and book profits.

Another way to identify undervalued stocks is to look at price-to-book value ratio (P/B) ratio of a stock. Stocks with low P/B ratio are likely to be undervalued. Investing in these stocks can give one profits, when the stock price rises. Warren Buffet follows the P/B rule for identifying stocks that are relatively cheap. He invests in stocks that have P/B ratio of 1.3 or less.