If you are reading this article,
that means you are ready to invest and buy some stocks. You might know all the
basics of stock market and might have researched on technical analysis as well.
Still you are sure to face some tough times over choosing a suitable stock to
invest. You’ll find tons of options in a big stock market and situation will
appear very complex and
confusing if you are a beginner.
Many might advise you to study the
stocks’ profit range and investors’ perception. But, this is an option next to
impossible. You’ll have to go through years of research before you invest. So,
of course this is not a viable option. Don’t panic. There are always some
strategies which could prove fruitful. If follow those strategies, you might
find the best stock for you to invest.
Deciding the goal
The first step to find a stock
investment is to decide the goal. Not everybody invest in stocks for income or
profit. Many invest for capital preservation, many do it for capital
appreciation. However, you need to find out in which criteria you want to fall.
If you want to preserve you capital, you should go for the stable blue chip
corporations. If you are income oriented, you
might choose the low-growth industries and firms like utility industry. If you
want your capital to be appreciated, you need to follow some other strategy.
Any strategy you follow however, deciding your goal is going to be the first
While choosing your stock to
invest, never commit the mistake of getting overboard with hype. It is not that
all those hyped stocks will prove faulty or terminate into failure. However,
there is always a chance that overhyped stocks might be overvalued. Remember
about the Mississippi Bubble history, when a company named Mississippi
dissolved like a bubble with thousands of investors’ money at stake.
Or you can read about the much
newer blunder the Dot-Com Bubble, when
thousands of investors invested their money in overhyped IT sector (which was
booming back than in 1994-2000) and ultimately gained nothing. The lesson is
not to avoid all the hyped stocks, but to take decision with proper knowledge
Price to Earning or P/E ratio is
the method of determining whether a stock is undervalued or overvalued.
Basically, people use this method to find the undervalued stocks and invest on
them as the undervalued ones tend to grow in future. But, things are not so
smooth always. You’ll have to consider some other factors other than P/E ratio.
A stock might be undervalued and
still might not prove profitable for you as its price might not rise according
to expectation. So, what you need to do is to concentrate on growth rate as
well. Also remember, not all undervalued stocks will be beneficial. Those
companies with higher and faster growth rate might set their stock’s face value
a bit higher than those whose growth is sluggish. So, don’t blindly depend of
Research on financial health
After primary research, you might
pick a handful of companies which have attracted you to an extent. Now, you
have to conduct an in depth research on them about their financial health and
history, about their growth, reputation and dividend.
Growth easily comes to the first
place as nobody would want to invest in a company which is not growing. Beware
of looking for day to day growth. Stock market is the most unstable market
place in the world. So, look for the yearly growth and see how well the company
has fared within a longer period of time. The company might have some falls but
still if the yearly growth is positive, you are good to go.
Also check the bottom line to know
how far the company did fall to learn the risk factor. Never forget to know the
amount of debt the company is currently bearing. On the other hand, dividend
could be an excellent indicator as companies having good time at the market
tend to give dividend to the investor. Also, if the amount of dividend is
rising, be sure the company is really having a profitable run.