How to choose growth stock

How to select winning stock in the share market ?

I have spent more than 6 year in the share market. During this period I have observed that there are mainly two types of traders. One is short term trader and the other is long term trader. The timeframe for short term may be one day or one week or often they trade in many times in a single day. But almost all of these short term traders lost their money in the market according to me.

The other type of traders (long term investor) always look for the best stock. For this they use many type of resources like TV channel, broker, newspaper or any expert friend’s advice. According to me they should ask some questions before investing in any stock. Today, we will discuss some important things which each investor should know about the stock.

·        How the company earns its income ?

It is very important to know that how does the company make money. Know about company’s core business and check whether the profit comes from core business or any other company’s arm. It gives a better understanding of the company’s risk and potential profits. Read company’s most recent annual report for detail about company’s business unit, its sales and earnings. You will go through other figure like EPS, net income etc.

As a shareholder, you should keen to know how much company have cash because it indicate the company’s dividend paying capacity or reinvestment in the core operation which can increase profit in the future.

·        Is financial documents are showing real picture ?

Some smart accountant and CFO’s show the rosy picture of the company and hide the real position of the company. In the books, sales revenue comes much before realization and it is very difficult to know whether it is real or not. Be alert to those companies whose sales figure increase very rapidly than other players in the same industry.

Many times to beat short term market expectation, the companies combined the sales of other arms also and show the average. For this they do many acquisitions in a very short period and in the long run integrating all these acquisitions prove messy and costly.

·        Is broader economy impacting to the company ?

Some company’s performance heavily depend on the state of the economy. These stocks are known as highly cyclical stocks. You should also know the interest rate moment in the economy. For example, if interest rate moving down then home loan, retail, appliance manufactures sector likely to perform well.

·        Do you know the real worth of the company ?

You must assess the company’s promoter and management team. Although it is not easy for every person but try your best to acquire the information. Check the debt figure on the balance sheet as too much debt increase the risk for the company’s debt servicing capacity in case of sales down or economy recession. Find those factor which can really hurt the profit growth in future like if the company is dependent on one client for its income. Compare its performance with its peer companies on year on year basis. Check the P/E ratio, if the best company available in cheap rate for any reason. Analyze the company’s future earning potential.  Avoid herd mentality when picking the stock.

Dear investor, if you invest on the basis of above discussed points, you will hardly go wrong. After this you always feel comfortable that you have invested after investigating the stock, in other word you have not gambled with your long term investment.

For more detail about any other query related investment, you can contact me through my email.

Regards,

Arvind Trivedi

Certified Financial Planner

arvind.trivedi79@gmail.com