How to select good stocks

The simplest route which retail investors follow while choosing stocks is to select it based on recommendation of some analyst on TV or picking it from the stock advisory section of a news paper. This at times sounds bit logical with respect to investors who do not have enough knowledge of stock analysis but what about the investors who react based on tips about some ABC company. They simply don’t know what the company does and what is the credibility of the source of the tip?

 


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Since the very beginning it has been fed into the minds of investors that stock market is risky which ultimately leads to low self confidence regarding stock analysis. The thought which always runs at the back of your mind is stock selection is a complex task so I should trust an expert. I am not questioning the approach you take but am trying to question the intent of the source of information.My primary concern is “Are you sure the analyst you are listening to or your source of stock tips is acting in best of your interest? Word of caution -Both the analyst and the stock tip provider are human and hence they will only work for their best interest and not yours. Together with this I would like to remind you, best services in this world don’t come for free. In reality you are paying your cable operator and your newspaper vendor and expecting stock ideas which will make you a crorepati. Does the bell ring in your head? If you want expert advice which will really work for you then pay the expert directly otherwise be ready to lose more number of times then winning. Is there any other option instead of paying the expert? Honestly speaking if you are ready to make your hands a little bit dirty then yes there is a better option.If you have a long term perspective as is advisable for extracting better returns from stock market the good news is the effort and knowledge you require is very less. If I speak quantitatively the knowledge of two most trusted ways of analysis Technical and Fundamental and half hour of effort is needed to be a smart stock picker. Let’s find out how.

 

Common Sense

The very first rule of stock market investment for retail investors who are less knowledgeable is choosing companies whose business they very well understand. Please refrain from penny stocks and small cap un herd companies. Best strategy is to stick with the index stocks as you will not regret your decision in the long run.

 

Selecting the best among equals – Fundamental Analysis?

You applied your common sense and are ready with the Investment Grade Stock list. What next? Almost all the companies which represent the index are good. Some analyst is recommending A, some B, now what to do. In such a confusing situation fundamental analysis comes to your rescue. Learn about the best fundamental ratios which almost always tell the correct story of the financial health of the company. The most important once are:

 

  1. Earnings per share (EPS)
  2. Price earnings ratio (PE Ratio)
  3. Book value per share
  4. Return on net worth (RONW)
  5. Profitability
  6. Debt equity ratio

 

I am not detailing the meaning of all these ratios and their desirable value intentionally here. I want you to make your hands dirty to understand them. If you really are serious about beating Sensex in returns you should stop looking for spoon feeding J. Mind you it’s very easy to learn what these ratios really signify. Browse the internet or reference some good book and it will put your curiosity to rest.

Applying these ratios will help you in isolating best among equals. Once you have understood these ratios it hardly takes 10 min to apply these on a particular stock and find out its health. The values of these ratios are easily available on financial sites like yahoo finance, money control, economic times etc.

 

Making the entry at right levels – Technical Analysis

So you have made the list of stocks in which you want to invest. Next step is to find out the right entry point. Is it the right price to enter the stock or is it the right price to book profit if you are already invested? The answer of above question lies in technical analysis. Technical analysis is a tool used by traders and investors to figure out the direction of prices of a security through the study of past market data, primarily price and volume. Using technical analysis one can find answers to the following questions:

 

  1. When to enter the market
  2. Which stock to buy and at what price
  3. When to book profit
  4. Which stock to get out from so as to minimize loss

 

Answers to above questions are sure shot way of being successful in stock market. So it’s better to roll our sleeves up and be ready to learn the art of Technical Analysis and mind you, it’s not as tough and confusing as it sounds. I am again not detailing the process of technical analysis and you already know why J.

 

Conclusion

It’s your hard earned money. Please be more possessive and don’t let anybody else play with it on your behalf. Let’s say you don’t have enough time for doing all these then at least don’t pay your cable operator for getting stock ideas. It will be best if you approach some good financial advisor in your locality, as by paying him you can force him to work for you and can question him when his advisory is not working. TV doesn’t listen, it only talks. Happy investing J.

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