How to pick the right stock?

Pranati Deva
Updated: 13 Dec 2021, 12:01 PM IST
TL;DR.

Picking the right stocks is the most important part of a successful investor. Here are some key things to keep in mind to help you make the right decision

Picking the right stocks is the most important part of a successful investor.

Picking the right stocks is the most important part of a successful investor.

New to investing and confused about where to invest. Choosing the right stock or combination of stocks to invest in is the first step to building your portfolio but it can be a difficult decision with so many options available on the basis of sectors, market capitalisation, earnings and more.

So, what should you keep in mind while looking for such stocks:

1) The most important thing is to keep up to date with the current trends happening in the stock markets. This will help you find good entry and exit points for stocks. For instance, suppose the auto sales numbers are going to come out and the sales are expected to be strong, it may be a good idea to invest in those before the rally starts.

2) Secondly one must look at the earnings trends of a stock before investing. How has it performed in the last 3-5 years, is it on a growth trend, is it performing better than peers? These are some questions you can answer looking at the earnings for a stock.

3) You must also be aware of any debt the company has. Fall in debt levels of a firm can lead to a sudden rally and vice versa. If the debt has been increasing over a long time without being addressed, it may not be a good sign for the firm. A firm with a very high debt level is also not sustainable in the long term.

4) It is also very important to check out its competitors before investing. If the firm has strong rivals, the rise may get divided but in the case of weaker rivals, it is likely to do better. If a rival has better performance, you might also want to concentrate on it.

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Picking the right stocks is the most important part of becoming a successful investor

5) Checking the price to earnings (P/E) ratio of a firm is also a very effective way to weed out overrated stocks. It can help determine if a stock is undervalued or overvalued which can help you decide your position. It is basically the ratio of the company's current stock price to its earnings per share. A stock with a very high P/E ratio is overvalued while a stock with a low one is undervalued. You can stay clear of stocks that are overvalued and look at stocks where there is more potential for an increase in value.

6) You should also look at companies with a regular dividend policy for long-term investment. Apart from some extra money coming back on a regular basis, it is also a sign for a stable company as against a firm that pays dividends erratically or does not pay at all.

7) Another important thing to check out before investing in the firm is management. Good Management is one of the key drivers for a healthy firm, while firms with management disputes and legal issues between management will be more distracted to solve those and the company's growth may get affected.

8) Finally, the best and the most effective way for your portfolio to work will be diversification. Instead of investing in just a single stock, invest in a number of stocks of different sectors and sizes to lower the impact of risk.

These are some basic things to keep in mind while looking for the right stocks to invest in. However, in case of any confusion or doubt, you must contact a professional for help.

First Published: 13 Dec 2021, 12:01 PM IST
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