5 Questions To Ask Whenever Anybody Recommends A Stock

Sumit Kati

22 Jul 2017

Many a times we come across a lot of people who recommend us to buy stocks. One of the biggest problems that we face is that everyone thinks themselves to be  an investment expert, especially when it comes to stock markets. Sometimes one can see that even a ‘Paan-wala’ has a view about the markets and stocks or the both of them. With such a situation,, one needs to be very careful.  Following are a few questions which could help one resolve such a situation.

1) What does the company do? What is the objective of the investment--value, growth or income? And why do you think the investment suits you?
If you don't understand the company's business, pass it on. If you're still intrigued, go on with that. If you are an income-oriented investor, that is, someone who needs regular dividends or interest, you can quickly eliminate the so-called growth stocks, which has great appreciation potential but you do not need to pay current income.

2) What are the prospects and competition in the company's industry? Where is the company positioned?
Is it a leader, an upstart, a niche player, or somewhere in the middle of the pack? Investing in the growing industries is less risky than investing in companies that are battling at the bottom of a shrinking market.

3) What is the company's earning and revenue history for the past five (or 10) years?  And does the company pay a dividend?  
A company that has been able to boost sales and earnings in good times and bad is clearly less risky than the one that has an inconsistent history. If the company has been paying dividends, one needs to find out if the dividends are consistent, or rising, or falling or do they vary year-to-year? And what is the dividend yield? (That's the cash dividend that is divided by the market price. In other words, if the company's stock sells for Rs.100 per share and each share pays Rs. 5 in annual cash dividends, the dividend yield is about 5%.) It's generally less risky to invest in companies that pay relatively generous dividends because the dividend can attract investors to the stock.

4) What is the company's price-earnings ratio and how is the ratio compared to the company's projected growth rate?
That's the market price divided by its per-share earnings. A company selling for Rs.100 that earned Rs.10 per share would have a price-earnings ratio of about 10. And how does that compare to its average price-earnings ratio over the past five to 10 years? If the company's price-earnings ratio is comparatively low, it might be a possibility that they are selling the stocks at a bargain price. And if it is higher than the average, you have to know the changes in the company's prospects to warrant the lofty market value. If the company's shares are selling 30 times of the current earnings, you should expect the company to be growing at a 30% pace, Johnson (who is Johnson?) says. Otherwise, it's going to take a long time for your investment to pay off.

5) Do you have research reports and other printed material on any website that I can look at, before I make an investment decision?
Ideally, you want the investment houses' research reports on the company and the industry. You want independent research, such as a Value Line report. And you want printed material from the company, including an annual report, 10-K and quarterly reports.

People who can answer all these questions have done their homework.

Once you do yours, by reading the materials that they have mailed, you're in a great position to make a good investment decision.

Of course, that doesn't mean you'll never lose money on another share of stock. But you will have a lot of knowledge about it.

Have Referral Code?

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mutual-fund

Why to Choose Mutual Funds Instead of Directly Investing Into Equities?

Whether to invest in equities or mutual funds is a question that has plagued every investor. As someone who needs the best value for his/her investment should you invest in equity directly or via mutual funds?

Let’s start by first understanding what these two terms ‘equities’ and ‘mutual funds’ stand for-

Equities- Equities generally represent ownership of a company. If you own any equity in a company, you are a part owner of the said company (depending on how much equity you own).

Mutual Funds – It is an investment scheme which is professionally managed by an asset management company. It pools together the resources of a group of people and invests their money in equities, debentures, bonds and other securities.

Why choose mutual funds over equities?

For people who’ve never invested in either stocks or mutual funds, it is hard to know which is better and where to start. Broadly speaking, if you are a novice investor, mutual funds are not only less risky but also way easier to manage. Here are some ways in which investing in mutual funds is beneficial as opposed to investing in equities -

Diversification

Mutual funds provide more diversification as compared to an individual equity stock. When you invest in equity, you are investing in a single company which has its inherent risk. For example, if you invest Rs.20,000 in buying equities of one company, you could face a total loss if that particular company performs poorly in the market.  

If you invest the same amount in mutual funds, it will be invested in different kinds of stocks and financial instruments, high-risk and low-risk both, so you might not face total loss even if one company does poorly.

Scale of Investment and Lower Costs

For an individual investor buying and selling stocks is a difficult task due to its high price. Thus, any gains made from stock appreciation are nullified if the overall trading costs are considered. Comparatively with mutual funds, as the money is pooled from a large number of investors, the cost per individual is lowered.  

Another advantage of mutual funds is that you don’t need to invest large sums of money. Buying equities for a profitable venture needs huge amounts of money, a minimum of few lakhs. With mutual funds, you can start with Rs.1000 and earn profits on that as well.

Convenience

Keeping an eye on the markets everyday is a time-consuming business, especially if you are investing as a side gig. There are people who spend their lives studying the market and still end up sustaining heavy losses. Though investing in mutual funds does not guarantee high returns, it is stress-free and needs less work as compared to investing in equities.

To sum it up

It is important to remember that mutual funds have their own disadvantages as well. Thus, as with any financial decision, educating yourself and understanding the suitability of all the available options is the ideal way to invest. 


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5 Questions To Ask Whenever Anybody Recommends A Stock

Sumit Kati

22 Jul 2017

Many a times we come across a lot of people who recommend us to buy stocks. One of the biggest problems that we face is that everyone thinks themselves to be  an investment expert, especially when it comes to stock markets. Sometimes one can see that even a ‘Paan-wala’ has a view about the markets and stocks or the both of them. With such a situation,, one needs to be very careful.  Following are a few questions which could help one resolve such a situation.

1) What does the company do? What is the objective of the investment--value, growth or income? And why do you think the investment suits you?
If you don't understand the company's business, pass it on. If you're still intrigued, go on with that. If you are an income-oriented investor, that is, someone who needs regular dividends or interest, you can quickly eliminate the so-called growth stocks, which has great appreciation potential but you do not need to pay current income.

2) What are the prospects and competition in the company's industry? Where is the company positioned?
Is it a leader, an upstart, a niche player, or somewhere in the middle of the pack? Investing in the growing industries is less risky than investing in companies that are battling at the bottom of a shrinking market.

3) What is the company's earning and revenue history for the past five (or 10) years?  And does the company pay a dividend?  
A company that has been able to boost sales and earnings in good times and bad is clearly less risky than the one that has an inconsistent history. If the company has been paying dividends, one needs to find out if the dividends are consistent, or rising, or falling or do they vary year-to-year? And what is the dividend yield? (That's the cash dividend that is divided by the market price. In other words, if the company's stock sells for Rs.100 per share and each share pays Rs. 5 in annual cash dividends, the dividend yield is about 5%.) It's generally less risky to invest in companies that pay relatively generous dividends because the dividend can attract investors to the stock.

4) What is the company's price-earnings ratio and how is the ratio compared to the company's projected growth rate?
That's the market price divided by its per-share earnings. A company selling for Rs.100 that earned Rs.10 per share would have a price-earnings ratio of about 10. And how does that compare to its average price-earnings ratio over the past five to 10 years? If the company's price-earnings ratio is comparatively low, it might be a possibility that they are selling the stocks at a bargain price. And if it is higher than the average, you have to know the changes in the company's prospects to warrant the lofty market value. If the company's shares are selling 30 times of the current earnings, you should expect the company to be growing at a 30% pace, Johnson (who is Johnson?) says. Otherwise, it's going to take a long time for your investment to pay off.

5) Do you have research reports and other printed material on any website that I can look at, before I make an investment decision?
Ideally, you want the investment houses' research reports on the company and the industry. You want independent research, such as a Value Line report. And you want printed material from the company, including an annual report, 10-K and quarterly reports.

People who can answer all these questions have done their homework.

Once you do yours, by reading the materials that they have mailed, you're in a great position to make a good investment decision.

Of course, that doesn't mean you'll never lose money on another share of stock. But you will have a lot of knowledge about it.

Have Referral Code?