Many investors, while having a good strategy for their investments, tend to miss out on the prior process of picking the right stocks. With the enormous number of stocks listed on stock indices, it can be challenging to narrow down on a certain list of stocks, let alone pick the right stock to invest in. Stock market trading India has been growing over the past years. However, more than 90% of the people who invest their money in the stock market face losses due to not picking the right stock. This is due to the primary reason of not researching thoroughly to pick the right stocks. Most often, these investors tend to follow the suggestions provided on online portals, friends, families, and other sources.
While these sources provided a certain level of information, they may not always hold true. So, it is best to perform your own research and weigh out the pros and cons before choosing to invest in a certain stock. In this article, we will have a look at how you can pick the right stocks and invest in them.
5 Steps to Pick the Right Stocks
To understand the process of choosing the right stocks to invest in, it is fundamental that you understand a few steps that involve understanding the different aspects of a company. Here are the 5 main steps to picking the right stock.
1. Fundamentals of the Company
First of all, it is key to understand the company’s fundamentals to understand if the company is profitable, consistent, has a good inflow of revenue, and other parameters. You can begin by understanding the different products and services that the company provides along with its competitors and its future prospects. Some of the key aspects that you can check for while understanding the fundamentals of the company are:
- Prince to earnings ratio
- Debt to equity ratio
- Earnings per share
- Return on equity
- Current ratio
- Price to book ratio
- Dividend
- Price to sales ratio
Once you understand these aspects about a certain company, you would be in a place to make an informed decision when it comes to picking a stock.
2. Understanding of the Products and Services
The next step is to gain an understanding of the products and services that are offered by the company. You can start by understanding the business model of the company. It is key for the company to have a solid business model that also has a proof of concept. By gaining an understanding of the business model and the products or services that are offered by the company, you would increase your understanding of the company and be in a position to gauge your decision about investing in the company better.
3. Future Scope of the Products and Services
Now that you have gained an understanding of the products and services offered by the company, it is important to understand if these products or services will stay relevant in the future. This can help you gain an idea about how your future revenue would be.
4. Outstanding Debt
Big debts in a company or business can be a red flag. It is also a sign of financial instability that may lead to poor returns on your investment. So, understand the amount of debt that the company has before going ahead with investing in their company. Before you select a certain stock, make sure that you go through their balance sheet and check the liabilities for any debt that the company has. In essence, it can be beneficial to avoid investing in companies that have huge outstanding debt. Further, also look for the non-performing assets of the company. Again, it can be beneficial to avoid investing in companies that have huge non-performing assets.
5. Management of the Company
Another key aspect is to check for the management of the company. This is very crucial as management is considered to be a key aspect of the company as it can make or break their business. Make sure to understand the strategy and goals of the company as it can provide you with an understanding of the potential future of the company. Moreover, check for the length of tenure of the management team as well. Companies that are stable typically have a longer management tenure compared to unstable ones. The promoter’s buying and share buybacks are also important aspects to check for while picking a stock.
In Conclusion
Choosing the right stock for stock market trading India can be challenging given the plethora of options that are available in the market. It is important to conduct primary and preliminary research before picking a stock as it can determine the potential returns you can receive after investing in the company. By checking for certain aspects such as the fundamentals, financials, outstanding debt, management, and the future scope of the company, you can make an informed decision about picking the right stock.
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