How Beginners Can Ensure Picking The Best Shares

Divya Nair

20 Dec 2016

Equities have out-performed any other investment assets in India over the last many years. NSE Nifty has given an average annual return of 12.5% in the past 10-15 years. But there are some stocks that have eroded investor’s wealth as well. Choosing which stocks to invest in is a step that decides the quality of your investments. For beginners, judging a company for investment is a challenge,

Parameters to Judge Best Shares -

Know The Company -

Investors can go through history and profile of a company. They should know the products and services the company provides, understand the revenue drivers and the status of capital in-flow. Also, investors should find out whether the company is making profit or losses and understand the reasons behind it.

Integrity In The Organisation -

We have seen in the past that unethical managements have shrunk many organisations. Even if a company does good business, engaging in unethical activities may sooner or later push it to its dooms.

Earnings -

A company with consistent financial performance should ideally be preferred over a company having a volatile financial history. Factors that determine earnings of a company are sales, costs, assets and liabilities. Before picking a company for long-term investment, people must analyse how much a company is making in profits. If the company is making profits, investors should analyze whether revenue, revenue growth, profits and profit margins are sustainable or not. In a loss-making company, an investor should investigate if there are possibilities of the company turning profitable in future.

Cash Flow -

Cash flow is the amount of money that moves in and out of a business. A company’s cash flow status reflects its operative activities. If a company is generating positive cash flow from its operations, it indicates that the company is receiving more money than it is spending.

Valuation -

A company with good future prospect would most probably have a decent market valuation. There are a number of valuation techniques that determine if a stock is undervalued or overvalued. Here are some of the relative valuation techniques:

P/E Ratio - P/E ratio is commonly uses in relative valuation. It indicates how much an investor is willing to pay off the earnings. If the P/E ratio of a company is 10, it means investors are ready to pay Rs 10 per Re 1 of EPS. Generally, a low PE stock is preferable over high PE assuming other factors of the company are same.

P/B Ratio - P/B ratio denotes how much investors are willing to pay off the book value of a company. If a company has P/B ratio of 2, it indicates that investors are ready to pay Rs 2 for Re 1 of the book value. A stock with lower PBV is preferable.

Dividend Yield - It indicates how much investors are receiving in the form of cash dividend for each rupee invested in share. For instance, if dividend yield of a company is 12%, it denotes that it pays 12% of its share price to its investors. Usually, a company with higher dividend yield is preferred, as that would mean more dividend income for investors.

Relative Comparison With Peers -

Investors should do a relative comparison of the company with its peers taking the above parameters into consideration. As a result, investors may be able to identify competitive advantages of the company over its competitors.

Conclusion -

An in-depth analysis about companies before investing in them helps investors stay away from wrong investments. Keeping the above factors in mind while analysing a business would ultimately help investors yield desired profit from their money.

Have Referral Code?

Similar articles

  • Responses
  • Patidar Samaj

    - 2 hrs ago

    This article claims RJio was given a "Backdoor Entry" into the 4G Based Voice Routing. The peculiar aspect is without the Voice License, Rjio would have been a mere ISP. With the license, it is now a holistic communications service provider, with ability to exponentially scale the bouquet of products. The events indicate it was meticulously planned way before the auctions because the auctions were clear on the agenda: 4G for internet only.

Load More
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. 


Banner

How Beginners Can Ensure Picking The Best Shares

Divya Nair

20 Dec 2016

Equities have out-performed any other investment assets in India over the last many years. NSE Nifty has given an average annual return of 12.5% in the past 10-15 years. But there are some stocks that have eroded investor’s wealth as well. Choosing which stocks to invest in is a step that decides the quality of your investments. For beginners, judging a company for investment is a challenge,

Parameters to Judge Best Shares -

Know The Company -

Investors can go through history and profile of a company. They should know the products and services the company provides, understand the revenue drivers and the status of capital in-flow. Also, investors should find out whether the company is making profit or losses and understand the reasons behind it.

Integrity In The Organisation -

We have seen in the past that unethical managements have shrunk many organisations. Even if a company does good business, engaging in unethical activities may sooner or later push it to its dooms.

Earnings -

A company with consistent financial performance should ideally be preferred over a company having a volatile financial history. Factors that determine earnings of a company are sales, costs, assets and liabilities. Before picking a company for long-term investment, people must analyse how much a company is making in profits. If the company is making profits, investors should analyze whether revenue, revenue growth, profits and profit margins are sustainable or not. In a loss-making company, an investor should investigate if there are possibilities of the company turning profitable in future.

Cash Flow -

Cash flow is the amount of money that moves in and out of a business. A company’s cash flow status reflects its operative activities. If a company is generating positive cash flow from its operations, it indicates that the company is receiving more money than it is spending.

Valuation -

A company with good future prospect would most probably have a decent market valuation. There are a number of valuation techniques that determine if a stock is undervalued or overvalued. Here are some of the relative valuation techniques:

P/E Ratio - P/E ratio is commonly uses in relative valuation. It indicates how much an investor is willing to pay off the earnings. If the P/E ratio of a company is 10, it means investors are ready to pay Rs 10 per Re 1 of EPS. Generally, a low PE stock is preferable over high PE assuming other factors of the company are same.

P/B Ratio - P/B ratio denotes how much investors are willing to pay off the book value of a company. If a company has P/B ratio of 2, it indicates that investors are ready to pay Rs 2 for Re 1 of the book value. A stock with lower PBV is preferable.

Dividend Yield - It indicates how much investors are receiving in the form of cash dividend for each rupee invested in share. For instance, if dividend yield of a company is 12%, it denotes that it pays 12% of its share price to its investors. Usually, a company with higher dividend yield is preferred, as that would mean more dividend income for investors.

Relative Comparison With Peers -

Investors should do a relative comparison of the company with its peers taking the above parameters into consideration. As a result, investors may be able to identify competitive advantages of the company over its competitors.

Conclusion -

An in-depth analysis about companies before investing in them helps investors stay away from wrong investments. Keeping the above factors in mind while analysing a business would ultimately help investors yield desired profit from their money.

Have Referral Code?