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.

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.