The two biggest stock exchanges in India are the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE). Together, there are more than 6,000 companies listed on their platforms. With literally thousands of options in front of you, it can be tough to pick the right stocks for your portfolio. In other words, where do you even begin?
Here are some tips that can help you make the right investment decisions.
1) Familiar with a particular sector? Start there
It is always good to know how a company or a sector functions before you invest. For example, if you are in the healthcare industry, you might already have useful knowledge about how pharmaceutical companies function. You can utilise this knowledge for your investment gains.
Beyond that, you can start investing in companies with business models that are easy to understand. Even the great investment guru Warren Buffett says that he does not invest in companies and industries that he does not understand.
2) Check the financial health
Go through the financial records of the company to find out its financial health. Take a look at the company’s track record regarding revenues and profits. There are three important financial statements you should read and understand before investing in a company. They are:
These three statements paint a financial portrait of the company. By reading these statements, you can get an idea if a company is profitable or not. And while the profitability of the company is important, it is also necessary to see what the debt situation is. It may not be a good sign if a company has large amounts of debt when compared to its competitors.
3) What is the stake of promoters?
Promoters are individuals or organisations who are generally the biggest shareholders in a company. In many cases, these promoters have key executive roles in the company. That’s why keeping tabs on their investment holdings can offer clues regarding the future prospects of a company. So when promoters increase their shares, it is taken as a good sign for the company.
4) Looking for a regular income: dividends are your answer
Most people invest in the stock market for two reasons: steady income at the present or high returns in the future. If you are interested in a regular income, then it is best to invest in stocks that offer dividends. Blue chip companies that have reached the maturity stage of the growth cycle tend to offer good dividends to its investors. By investing in such companies, you can earn steady returns to finance your current needs.
5) Long-term investments
The stock market is an ideal investment avenue if you want to invest for the long term. Warren Buffett once said: “If you aren’t willing to own a stock for ten years, don’t even think of owning it for ten minutes.” Look out for stocks that have high growth potential in the next five to 10 years.
For example, if a company reinvests its profits back into the business, it is an indication that the company has good growth potential. This way, the company positions itself for long-term growth and success in the market. By investing in such stocks for the long term, it is possible to create a big corpus for your future goals such as buying a house or retirement planning.
Buying stocks is a science as well as an art. With more experience in the stock market, you can become a better investor. But to reach that state, you need to put in time and effort to learn and understand the different aspects of the stock market.
Disclaimer: Investment in securities market are subject to market risks, read all the related documents carefully before investing.