“Hey! Why don’t you invest in stock market?”
Every earning individual who is financially capable of investing money for future has come across this statement at least a few times in his/her life.
And most people, in some way or the other, do try their luck in stock markets at some point in life. But, very few people go about investing with clarity in mind and an action plan.
In this article, I will tell you all that you need to know for selecting, analyzing and actually investing in the right stock.
But before that you need to do your homework and keep the following things in mind to reap successful returns from the stock markets:
1. Define your objective
The stocks (or shares) you choose or the price at which you buy/sell or even the timing of buying/selling depends on your objective of investing.
Many people invest for a quick buck without having to wait for long, others do it for future income and there are a few who do it for tax benefits.
Whatever your objective is, please stick to the original investment plan and try not to deviate from it.
2. Don’t hatch all your eggs in one basket
Avoid investing all of your money in one stock. The chances of succeeding in making money out of a single stock, irrespective of the volume of stocks, are highly bleak.
Try to maintain a healthy portfolio of stocks from various industry verticals and company sizes, and if possible locations as well. This will help you in diversifying your risk and maximizing returns.
3. Be patient, and do not act hastily
One of the key factors of being successful in stock markets is being patient.
Do not expect immediate returns, and more importantly do no buy or sell stocks in haste without doing your research.
Most of the hasty investors blame it either on luck or on the stock market itself if they bear losses, rather than their own impatience.
Once you are clear with the above mentioned tips, now is the time to make investments.
How to research a stock for investing?
Depending on your objective behind investment, you may choose a variety of stocks.
There are equity stocks, preferred stocks and income stocks amongst many others to select from.
Get clarity on the type of stocks that you want to buy and then start your research.
All the stock markets around the world have their websites with details on all the companies listed with them.
Each country will have its own finance portals with these details for investors like you to access.
Depending on your budget, choose a stock that is a best buy option for you at that point in time.
There are a bunch of analyst reports on most of the listed companies for you to check the status of the stock in the market.
These analyst reports are published from time to time stating whether to buy, sell or hold the stock depending upon the current market conditions.
These reports are publically available, and you can go through the detailed analysis of these stocks.
Different analyst reports might give you a different opinion on the same stock at any given point, but what you need to understand here is that these reports are just to help you determine your plan of action.
Please do not follow them blindly. However, you can look at the past reports of the same analyst and compare it with actual results of the stock to get the confidence higher.
How do you research a stock and determine to buy/sell?
Buy a stock from the industry or a company which is doing good and is expected to grow in the future.
You can find out about it by looking at their annual growth rates for the last 2 to 3 years and the kind of investments (either domestic, foreign or government funded) taking place in that industry space or within the company.
If the industry is promising, any time is a good time to buy in the near future.
Try not buying stocks just because they are cheap.
This is the most common mistake most of the investors make and regret it later.
It doesn’t matter if the stock is expensive or cheap. If the stock that you feel is expected to do well (after your analysis, of course), then go ahead with it and buy less number of units.
Even if you buy 5 units of an expensive stock at a time, it is a good investment strategy.
The most common reason and the most appropriate time to sell a stock is when it is at its peak.
While buying a stock, you should always have a target price in your mind to sell it off.
Once your stock reaches that price point, it is suggested to sell it off and stick to the original plan of action.
Another reason to sell a stock is deterioration in performance of the company or the industry.
If the dividends are retained or reduced for more than once in a year, take it as the first signal to sell it off.
Look at the company’s future plans to revive its profits and take a judgment call on the basis of your analysis.
How do you analyze a stock?
Information is of utmost importance for analyzing any stock. You should know what to look for and how to interpret what you have found.
You should mainly look at the following indicators, amongst many others, to decide on which stock is worth investing in:
- Earnings per share
- Price to earnings ratio
- Debt Equity ratio
- Cost of capital
- Return on equity
- Dividend yield
- Price volatility
There are a lot places wherein you can find this information about a company, but the best place is the financial results of the company (All this information is available in the Annual report of the company).
You might not know what each of these mean, but there is enough content available online and otherwise, to know and understand what each of these signify.
Please understand what these numbers indicate and make a rational decision.
Another important data point to look at is the company’s allocation of profits.
Hope this article gave you clarity on investing in the right stock!