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
