How to select a Stock for Investment

How to select a Stock for Investment 1Stocks are not easy to buy. When ever you are convinced that equity is a class with most returns, moment the worry starts. And the main cause of worry is how to invest in SHARES?

This article endeavors to find ways of investing into shares. It will try to answer the very basic questions that how one should fix which company’s shares he should buy. Also suggested are some of the analysis that one should be doing before taking a decision to buy or sell a stock.

The steps in buying a stock involve two steps:

1)      Analyzing Stock

2)      Momentum Tracking

How to select a Stock for Investment 2

ANALYZING STOCK

So today, India looses the first test on South African Tours by 25 runs and an inning. The team with record holding players and a team who is a probable winner in the forthcoming World Cup lost so badly. Although winning and loosing is a part of game but easily one who is a follower can identify the main reason was the team could not get a hand on to the bouncy wickets. They arrived South Africa just a couple of days ago and did not play any practice match and were straight away into business. In investment decisions also one need to do the homework. You need to analyze the track and do some basic research. This analysis can be done in two ways:

Bottom up Analysis: it consists of analyzing the individual company. First you identify a potential company and than do a fundamental research of this stock. You check the earnings, there consistency, cash flow, growth prospectus, reviews of balance sheet and P&L account. The aim of this research is to discover the value hidden in the stock of the stock. If a stock at 100 is still trading at 100 a year after even though reporting a earning rise of 30 percent means that the stock has value which is still to be unlocked.

Top down Analysis: Here the analyst targets trends of a sector or an industry. For eg we all can sense that there is lot of thrust on the agricultural sector. Even the government is encouraging the agri-industry hence it opens an idea that agricultural and allied industry can be expected to grow in coming years. Once you zeroed down a sector you try to get the leading players or the companies in this sector. After this the basic checks as mentioned in the bottom up analysis should be done.

In analysis one should always keep this thing in mind that: A brilliant analysis done on a wrong stock would not give you a brilliant result. So, if you are a beginner, start with big names for instance, start doing these analysis for companies figuring in BSE 100 index.

MOMENTUM TRACKING

Market is a very busy and a happening place. It runs on information. Good news or a bad news can change the stock price without considering a strong positively analyzed stock. So tracking the market momentum is very important. The change in price of a share is guided by a basic principal which says that- All assets which are attracting money will keep on getting money till they get expensive (overbought) and assets which lose price will keep on loosing till they bottom out (oversold).

Hence momentum also plays a very important role. Retail investors can catch the momentum in by leaning to note the RATE OF CHANGE. It is a very simple technical indicator which provides information regarding change in the price of a stock in given period. It can be expressed as a simple price-difference figure, or as a percentage-change figure. Rate of Change indicator can be positive, negative or zero.

Also Read:
10 Investment mistakes to Avoid
Understanding Gears in Investment Vehicle

To obtain the Rate of Change indicator as a percentage, the following calculation is used:

ROC= ((today’s closing price – closing price at [period number of days ago]) ÷ closing price at [period number of days ago]) x 100

The stock with positive and high ROC means they are attracting money and a low or negative ROC means the stock is not getting enough money. After tracking the ROC, one should invest in the stock. ROC is one of the measures that technical analyst use although they have software to track this on any time frame. For us we just need to see that we are investing in a market active stock and not a dull stock.

I hope these two small measures will help you buying or selling the shares. In the end I am not advising just sharing a small learning.

I would prefer to buy:

Strong stock in the strong sector rather than buying a strong stock in a weak sector and will never buy a weak stock in a weak market.

This article is written by guest author Madhupam Krishna. A Post Graduate in Finance, currently he heads sales function for Rajasthan for Principal PNB Mutual Fund.

Disclaimer: This post represents the opinion of its author only, and does not necessarily reflect the opinions of  the author’s employer, The Financial Literates or the other authors who write content for this Website.

7 COMMENTS

  1. Thanks for wonderful articles educating people about financial planning. I am a salaried person with Rs35000 per month for investment/savings. Right now every month I invest 26000/- in my provident fund, 2000/- in bank RD and 7000/- in savings account. After reading your articles I am planing to invest 10000/- every in Mutual funds through SIP. How much should I reduce above investments to meet the goal and how many sips should I start.

    • Hi Sandeep,

      Savings account is not an investment – just have some amount for emergency needs.(close to 3-4 months expense)

  2. Hi Hemant,

    Great Article by the Author M. Krishna.
    Very Basic explanation and good to read article for the amateurs of investing in the stocks today.
    Keep up the good work

    Regards
    Bhawin J

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