Picking the right stocks is the key to success. But there lies the challenge. There isn’t any single theory that can be applied when it comes to understanding how to pick stocks. There isn’t any definitive science that you can stick to. What there is a plethora of factors that need to be taken into account before putting your hard-earned money in a company stock. That’s because analysing the various factors can help you make the right pick. So, let’s go through the various factors you need to take into account before knowing how to pick good stocks in Indian market and optimising your investment:
Company fundamentals: To discern how to pick stocks, you would have to do some research and find companies that have strong fundamentals. Analyse the financials of the company based on some key financial ratios.
Earnings per Share (EPS): This indicates post-tax profits of the company on per share basis. For instance, increasing EPS indicates that the earning power of the company is on the rise.
Dividend Yield: Consider this aspect if the primary
objective of your investment is to know how to pick stocks for long term and earn a steady income. It indicates percentage of return that can be expected in the form of dividend on your investment at the current market price. An increasing dividend yield indicates that the investment has potential to provide regular stream of income.
Price to Earnings (P/E) ratio: This is calculated by dividing the current market price of the company’s stock by its earnings per share (EPS). It shows how much the market is willing to pay for the earning prospects of the company. If P/E ratio is high, it means the stock is overpriced. If P/E ratio is low, it means that the company has a good growth potential. However, this strategy holds water if you compare the stock with its peer company.
Price to Book (P/B) ratio: This ratio is calculated by dividing the current market price of the company’s stock by its book value per share. High P/B ratio indicates that the market value is more than the book value. Lower P/B ratio indicates that the company is undervalued. It’s one of the ways to evaluate banking stocks.
Thus, companies with increasing earnings per share, increasing dividend yield, lower price to earnings ratio (P/E) and lower price to book ratio (P/B) are considered healthy. Basically, these records show past performance of company. Based on the fundamentals, you can shortlist companies that are worth investing.
However, you can further distil your stock choices by looking at the following factors:
✓ Nature of business: A company’s business model can give you an insight into its future prospects. It’s also better to invest in businesses that you understand. Knowing the nature of business and its model can help you take better decisions.
✓ Company’s management: Details of a company’s promoters and their background are easily available on the internet. Look for a management that is stable and experienced. These traits can be a good indicator of the company’s future potential that can help you understand how to pick stocks for day trading.
✓ Stock valuation: Picking the right stock at the right price is the key. It’s important to analyse whether the price of the particular stock is fair or expensive. So, do due diligence before you buy the stock. Make sure you aren’t paying a premium.
In a nutshell, informed decision is the key to knowing how to pick the best stocks for successful investing. Although there is no Bible to guide you, poring over the company’s activities can help you gauge its future prowess.
Disclaimer: Investment in securities market are subject to market risks, read all the related documents carefully before investing.