How to Pick Stocks: 7 Things to Consider Before You Invest In Stocks

Are you a new investor or making your first stock investment? If so, you might be confused about stocks and investments. Making a stock investment will undoubtedly help you grow your money, but only if you take the right decision at the right moment. To achieve that, you should conduct some study and seek professional help. The following will undoubtedly help you in selecting the appropriate stocks as well as what information or data you should verify prior to purchasing any stock.

7 Things to Consider Before You Invest In Stocks

The major process of picking the stocks are:-

First, identify some of the industries that have been performing well for several years. Understand the products and services offered by those industries.

Next, consider how long these products and services are expected to last. Are these items and services likely to be used in the next 15 to 20 years? If the answer is yes, look for companies in those areas and conduct in-depth study on their management, popularity, debt, and competitive edge.

Finally, if everything is in order, they will be shortlisted based on the company’s fundamentals, goods, and future prospects.

But let us dive more deeply to see what more things are considered to pick the right stocks so that we are able to grow our hard-earned money.

Also Read: How many types of shares are there in the stock market?

Below are 7 Things to Consider Before You Invest In Stocks:

1. First, educate yourself

90% of people lose money in the stock market because they invest without doing adequate stock research. Furthermore, the abundance of companies on the market confuses investors as to where they should invest and where they should not. Take the time to learn the basics about the stock market and the financial assets that make up the market before making any investment decisions. Before entering the market, any investor should familiarise themselves with the following pointers:-

a> Must understand and evaluate the company on the metrics wherein you are investing like PE (Price to Earnings Ratio), EPS (Earning Per Share), ROE (Return On Equity), PBV (Price to Book Ratio), Debt to Equity Ratio, Price to Sales Ratio (P/S), Current Ratio, Dividend, Market Cap and so on.

    • PE (Price to Earnings Ratio) – It should be lower compared to others.
    • EPS (Earning per Share) – It should increase constantly over the last 5 years.
    • ROE (Return on Equity) – Last 3 years avg. should be more than 15%
    • PBV (Price to Book Ratio) – It should be lower compared to others
    • Debt to Equity Ratio – Debt should be zero or less than 0.5
    • Price to Sales Ratio (P/S) – Always preferred the smallest value.
    • Current Ratio – It should be more than one
    • Dividend – It should increase constantly over the last 5 years.

b> Must be thorough with Fundamentals as well as technical analysis along with its timings and selections.

c> Be aware of trading policies, processes, specifications, rules, and regulations, like market orders, stop-loss orders, limit order, stop market orders, stop-limit orders, trailing stop-loss orders, and many more similar terminologies which have been used by investors, margin money required if you want to trade in Futures and Options.

2. Check the trend of the company’s earnings growth

Do the company’s profits rise on a regular basis? It’s a good sign if a company’s profit grows consistently. Check to see if the company’s revenue and earnings are expanding or declining; you should be informed of the company’s intentions to improve earnings, sales, leads, and develop goods that are useful and helpful to people.

3. Company’s strength in comparison to competitors

Conduct a SWOT analysis of the company from which you intend to purchase stocks.  It is necessary to examine how the company differs from its competitors. What are the market shares of which company?  Compare a company’s profit and stock performance over a period of time to understand their performance relative to one another.

4. Debt-to-equity ratio

To a certain extent, all businesses are in debt. Debt can assess a company’s financial health. Divide the entire liabilities on the company’s profits statement by the total amount of shareholder equity to calculate the debt-to-equity ratio. It should be less than 0.3; if it is too high, it may favour profits.

5. P/E ratio can give an indication of valuation

When using value investing strategies and fundamental analysis, the Price-earnings ratio is an indicator to check whether a stock is undervalued or overvalued in the market. To find the Price-earnings ratio (P/E) ratio, divide the company’s share price by its annual earnings per share by the past year.

6. How the company treats dividends

A company that pays dividends is considered to be a more sound and stable company. But sometimes, the company cuts dividends to secure more liquidity during tough financial times but if this short–term problem exists for a long, then you may have to re-evaluate your position.

7. Long-term strength and stability

The stock market swings every day and year, demonstrating its volatile character; hence, in this unpredictable market, a company’s long-term stability is important. The trend lines should be smooth and pointing upwards. Growing revenue, maintaining low to moderate debt levels, being competitively positioned in its business, and having competent leadership are all hallmarks of a stable corporation. If any of these factors change, investors should keep an eye on them and decide whether or not to buy.

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