Choosing a stock is not a piece of cake. It requires a great deal of patience, discipline and extensive research about the market. The bull market attracts many prospective investors who view it as a treasure. If you want to select a stock, joining a trading community and setting out an effective investment strategy should be your priority.
Consider the following factors while investing in the stock market. These factors are more important than anything else.
Look at the Opportunity Size
The size of the opportunity for constant growth and successful trading is indispensable. Search for a company, which is a leader in the industry, having potential and growing at a rapid pace.
For instance, the e-commerce industry in India is nascent. It has great potential growth due to the increasing propensity of online shopping in the country. So, investing in an e-commerce firm can be fruitful.
Observe Revenue Growth
Look at the company’s revenue growth. Anything can happen at any time. In the trade marketing, stock prices increase in the long run when companies make more money. Therefore, keep the ‘revenue of the company’ on top of the line when choosing a stock.
Be Aware of the Competition
Each company encounters risks. The level of risk depends on the competition in the industry the company operates in. As an investor, you need to look at a company, which operates in an industry having a week competitive space and comparatively high entry barriers. A week competitive environment enables the company to grow and increase its market share. Telecom is the right example of a week competitive space and a huge entry barrier.
Evaluate Growth Rate:
Evaluating the previous financial outcomes of a company is as imperative as the outlook for future growth. A company with a high growth rate history along with having a high potential for growth in the future is an attractive option for investment. In general, setting out a 20% growth rate as the benchmark for evaluation is a fair idea.
Avoid choosing a company functioning in an industry, which has high interference from the regulatory authorities. It’s advisable to select a company which is less regulated. One such industry is FMCG, as it has low interventions from the regulator.
Weigh Debt Liability:
Choose a company having minimal debt liability over highly leveraged companies. The higher the amount of leverage, the lesser the chance of the company’s growth. High debt burden weighs down the development of a company. In such a firm, a substantial portion of earnings goes towards the finance cost.
Measure Efficiency in Capital:
RoCE (The Return on Capital Employed) is a significant parameter for measuring the effectiveness of the capital employed. A company having high RoCE means it is generating high returns on the employed capital. It can reinvest its profits for the long-term growth. So, consider a company that has high RoCE.
You can calculate RoCE by dividing it by net operating profit or Earnings before interest and taxes (EBIT) by the employed capital.
Shareholding Plan of Promoters
Promoters’ shareholding plan of a company indicates how much faith they have in the future of the company. A high pledging of promoters’ holding puts a question mark over the management of the company and the likely sale of shares in the market. This causes a fall in the stock prices.
You should always prefer a company which has minimum pledging of promoters’ holding over companies with high promoters’ stock pledging.
Evaluate Growth Nature:
Before selecting the stock of a company, it’s essential to evaluate the nature of the company, i.e., the source of funds for growth. Growth capital can be either raised from external sources or generated from operations. A persistent dilution of equity to raise money is a longstanding disadvantage for the minority shareholders, as the earnings will be constantly diluted.
You buy any item at a store you know well, such as your favorite retailer at a local shopping mall. If you don’t know much about the store you want to buy your items from, you read about it online or discuss with your friends. Same logic implies when selecting a stock. Exercise your due diligence, research about the market, join an online trading community and apply your own common sense to decide when to buy a stock.
Don’t assume the stock you buy will rise in value anytime soon. The increase of a stock’s price to its real value takes time. It’s better to hold a stock for three to five years without losing your patience -especially if you are self-reliant in its ability to grow.