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5 tips to select stocks for investment

A general trend that one observes in the equity market is when share prices start falling, many investors, especially in the retail segment, follow a wait-and-watch policy to enter the market. They try to look beyond at the reversal of the ongoing trend.

However, by the time they react, equity markets usually move up substantially. By then they find the market overheated and either stay out and wait for the next correction to participate or are left with no option but to invest money at those levels.

As it is sometimes difficult for investors to calculate the reversal in trends at its early stage, most enter when the markets have run up significantly. Stocks provide low risk high returns in long run which makes the point of entry insignificant, however, generally not many investors invest with a long term perspective.

Follow these tips to find some good stocks to invest in any market scenario :

  1. There are always good investment ideas available. One just needs to search them out. One should invest in stocks which are available at attractive valuations and have good growth prospects. In fact, it is good to be a contrarian and look for sound companies in which the general view is negative.
  2. A few parameters remain constant to find good stocks such as kind of business, quality of management and revenue visibility. You should go with the sector, which is easy to understand and has a clear revenue visibility for the next 2-3 years.
  3. You should do some research before putting in money in any stock. Choose sectors that have showed higher capacity utilization and higher returns on capital. Once a sector is identified, identify companies within those sectors. A good starting point can be quarterly results declared by companies. Therefore, you can adopt a top down approach to identify the sectors and then the stocks within those sectors that will perform well in the next 1-2 years.
  4. In a market which has already gone up to some extent, it is the valuation that becomes the deciding factor apart from the factors mentioned above. Every thing has a fair price. A stock might be fundamentally strong but high stock prices can make it unattractive. For companies in different sectors, you should use different measures to see the relative valuation.For instance, for banks and other financial institutions, one should use price to book value ratio, whereas, for manufacturing companies one can judge through replacement cost. Land bank and their market value could be factored in to take a call on a real estate company.
  5. Since the stock markets are influenced by a variety of factors it is advisable to seek advice from experts having knowledge and experience of investing in the markets, especially when markets have gone up by some extent.
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Manish Misra
Manish is an Internet Professional and is currently employed with India's leading internet portal. He has versatile experience spanning across internet, e-business and retail financial services domains.

He has authored several analytical articles on personal finance in The Times of India and The Economic Times. Being a finance geek and having been involved with internet since the early days of the medium, he was a great help and source of guidance while formulating personalmoney.in. You can know more about Manish at ManishMisra.com

Disclaimer : Manish has agreed to write in his personal capacity. Views, opinions expressed in his articles are his own and do not necessarily reflect the views of his employer.

http://www.personalmoney.in

8 thoughts on “5 tips to select stocks for investment

  1. Nice tips Manish,
    Generally it happens that at the time of correction we wait for more dip, and by the time we react, it happens too late,
    Point number 4 is really new for me, like "For instance, for banks and other financial institutions, one should use price to book value ratio, whereas, for manufacturing companies one can judge through replacement cost. Land bank and their market value could be factored in to take a call on a real estate company."
    Thanks

    1. Thanks Khalid!

      Yes, point number 4 is specially relevant when markets start recovering from a bearish phase. Price-to-book value provides the conservative measure of the value of the company. It can help identify an investment opportunity in an undervalued company which can provide a better appreciation potential as markets gains strength. Similar measure for manufacturing companies are value of their plant and machinery, real estate and other real assets. The objective is to pick-up companies that are undervalued vis-a-vis its peers.

      Please provide your feedback on this line-of-thought.

  2. Hi,
    This blog is really good.

    Stock market India is volatile and all those who speculate in market are loosing everyday. Please remember stock market is not for speculation purpose. If one feel investing in stock market is gamble then its better to think again.

    One should always note that if they want to invest money they should do proper research be it fundamental research or technical research. Just think how come you can invest
    your money without any convincing reason for the same?

    Indian stock market is one of the most happening and emerging market. Major Indian stock exchanges are BSE and NSE and both are of world class standards.

    So grab good stocks and invest that?s the bottom line.

    We hope to see you in major profits.

  3. Of course, point number 4 is mainly applicable when markets begin improving from a bearish phase. Price-to-book value offers the conservative measure of the value of the company. It can assist identify an investment prospect in an underestimated company which can offer a better appreciation potential as markets gains strength.

  4. I find these tips very helpful, definitely one needs to do a lot of research & planning for finding a good company to invest, moreover, doing a background check on the company is also good, apart from that taking advice for the experts is must as it can help you to get the information about the ongoing condition of the stock market. I have learned from my experiences, some good and bad. I did a mistake once in my career in the beginning by investing in fortress real development, a real estate company which was supposed to give me good return on investment but instead the company went bankrupt, i was a newbie that time.

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