After watching my previous posts on Linkedin, many friends called me and asked “hey bhai, hum toh sirf news dekhke ye friend bolta he usi stock me invest karte he. Tu kya karta hai? How do you decide stock? What you see before investing?”
So, I am writing this post regarding what are the points to be considered before investing and same includes General Observation, News, economy Trend, Sectoral Trend, Analysis from Various Stock Screeners, Certain Extraordinary Situations, Your Area of Expertise, Competitive Edge, Fundamental and Technical Analysis and The Sense.
Many will not agree with me, but believe me this is the way many investors invest into right stock. In the times, I was in school, there was friend of mine who was of 26 years then (it is good thing to be friend with elder ones. We got free advice and experience too). One of them had purchased Royal Enfield bike in 2006. I was not aware of share market at that time. But when I came to know about rally gave by Eicher motors in 2012-13, I was surprised. I thought what if he had purchased share of eicher motors instead of bike? That gave me first lesson on how to select stock for investment.
This is the first step to develop a stock idea. All you need to do is to keep your eyes open and observe what is going on. More e.g. on this might be Maggy (Nestle), yippi noodles(ITC), Maruti Suzuki cars, undervalued share of TATA Motors etc.
You just need to check what is trending in market. You need to think what will happen after COVID-19 lockdown, will people prefer Netfilx or will go to PVR, will real estate sector see boom? Think on it.
Second step is to read news about stocks we picked. Are there any negative news? If yes, will it have permanent impact over share price? Is it good time to invest when there is bad news about particular share? What are views of investors on the news came? You need to analyze the situation. DO NOT invest merely by watching news on TV Channels or articles in newspaper. Analyze.
e.g. Will real estate sector see boom after COVID? Which companies will have positive impact due to real estate boom? What will happen if Google invests in Idea-Vodaphone? What is impact on Indian pharma sector due to issue of – US pharma Licence?
Yes, you need to think on it. Without thinking it will be like rat race.
Keeping track of economic trend is a great way to identify good stock. It is said that, Market and Economy trend always go hand in hand.Here is an illustration of the same – as of today, there is a great push for infrastructure projects in India. An obvious beneficiary of this push would be the cement companies operating in India. COVID-19 gave boost to Pharmaceutical sector. Hence I would look thru all the pharma companies and identify which company is well positioned to leverage this economy trend.
Now, new trend of online classes came in force. Now it is your duty to study the related companies and to select appropriate stock.
This is little child of the point I discussed above. One needs to track sectors to identify emerging trends and companies within the sector that can benefit from it. For example, Banking and financial market is very traditional sector. Most of the banking sector stocks are undervalued (Article is written in mid – covid 19 lockdown) as of now. Hence investors need to check for companies within the sector that is best positioned to leverage this change and adapt to it.
E.g. what trend ‘Automobile sector’ is showing? Which company is best positioned? Which stock is really undervalued and can give you better results? Analyze it.
Stock screener is a tool that investors and traders can use to filter stock based on user defined metrics. It helps you to screen for stocks based on parameters you define and therefore helps investors to perform quality stock analysis. For e.g. you can use Stock screener to find stocks which have Net Profit ratio of 30% or more along with ROE of 22% or more. Many websites provide free stock screeners out of which my favorite one is money control. com. Stock screener helps to shortlist handful of investment ideas from big basket of stocks.
This is tougher ways as compared to others. One has to follow companies, keep track of news, keep track of share price, read company related news and events etc. This is a special case, where you find stock attracting. For example, when US declared positive trade policy for Indian Pharma Companies – that was trigger that Cipla will give positive return and I bought it at Rs. 441/- and is trading above 630/- within a month. It gave me 42% returns within a month. This is example of extraordinary situation. What happened when google announced to invest on Idea? Was that
a trigger? What was position of share price of Idea? Analyze it.
This is where you have leverage to outperform. This is highly recommended technique for new investors. This method requires you to identify stock within your area of expertise. Suppose, you are an engineer and work with XYZ limited, a listed entity, you need to understand the performance of Engineering companies to identify which is the best one. Which company has lowest cost of production or which company has better machinery to outperform others.
You will probably be a better person to understand that Industry than any stock broker or equity research analyst. All you need to do is identify which are listed companies in this space and pick the best based on your judgments. So, leverage your area of expertise and your professional
domain to pick your investment.
This also termed as ‘The Economic Moat’. This refers to company’s competitive edge over its competitors. A company with strong competitive edge ensures the company’s long term profits are safeguarded.
Examples of competitive edge are 1. Cement company having its own limestone mine which gives competitive edge over its competitors by reducing cost of production than that of other companies. 2. IT companies securing patents. 3. Companies having cheap labor arbitrage over its
Investor should study the company before investing to find a competitive edge of company. Edge might be anything like wider distribution reach, bigger brands, licenses to trade, focus on niche clients etc.
This is what every investor does or at least tries to do. Company’s Annual Report really gives helping hand here. You can analyze company very easily by going thru its Annual report. It gives you lot of information about company’s goals, visions, strategies, shareholding pattern etc.
There are many tools which help to do technical analysis. Investors generally do this all time so no need to speak about it more.
This is what no one will tell you to do before investing. You need to use your sixth sense always. This is most profitable strategy many times. You must ask yourself whether this stock will really give me good returns? Your heart will answer you. This is most profitable strategy because it uses
our brain as well as our heart. If you have positive attitude towards your investment, you will never fail. In my case, my 6th sense says, you must invest in Yes Bank as it will surely give good returns in long term. (it is my personal opinion, and I do not recommend it to anyone).
So that’s it. If you make a checklist and find appropriate stocks, comment your views and valuable advices.