How to research stocks?
How Stock Market drives your Personal Financial Growth
A simple answer ‘How to select stocks for investment in India‘ right?
Right, but the question is How?
How does the stock market work?
How to pick stocks?
There are several options resolving over your head like:
- Listen to Expert on Bussiness Channels every Morning
- Follow the tips received through SMS
- A guideline from your Trading company
- Or go with your own assumption
Is self-assumption, ‘sound confident’ – but really work for you. Yes !!
In this article “Stock Selection Strategies”, I won’t drag you to Fundamental Analysis or Technical Analysis, you yourself become the master of understanding the concept of selection of companies with bright future prospects.
There are hundreds of thousands of listed company in the market with different sectors and different values.
Before Investing in the Stock market you must aware of the market scenario, the economic condition, which sector is outperforming and which sector is under pressure.
You have two option whether you go with the market treat for selection of Sector or you can go for your own choices or you are interested in.
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Sometimes if you select the sector at the wrong time you just have to be patient.
After selection of Sector for instance Hotels:
Arrange all shares in three category
- Mid Cap
- Small Cap
You can also categories the shares by labeling with the Prices.
- Shares value between ₹ 700-₹ 500 treats those Large Cap.
- Shares value between ₹ 500-₹ 200 treats those mid. Cap.
- Shares traded below ₹ 200 treats those small Cap.
I have gathered data from some companies working in Hotel Industries for analysis and getting the right choice.
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Chapter wise explanation of Stock Selection Strategies:
Stock selection strategies in emerging markets:
Chapter No 1.
let’s start with analyzing the data:
Analyzing the Data is one of the initial steps for a younger investor for Share market,
The Question raised?
“What is the Value Stocks”
As we all know that the company business revolves around money and how much money a company makes.
The Revenue of the company involves “Sales”, “Income from other sources” & “Return from Investments”
If the Company Sales as compared to their competitors in the same sector is great, then it could be the best option.
Is that true! Yes
but not as such, there are several other calculations waiting to announce the performance of the company.
If the Grocessary Store owner A sales, is around ₹ 50000 per day and the other Grocessary Store owner B accros the city sales is around ₹ 20000 per day, doesnot justify the performance of the store. May be the expenditure of Owner A is 30 % higher then the Owner B, May be the initial investement of Owner A is ₹ 5 Lakhs and Owner B starts with ₹ 3 Lakhs.
At a Glance, you can not figure it out the performance and Profit Percentage.
In the above example:
If we compare the sales of the company with the market capitalization, we will see the percentage (%) difference of every company.
What is Market Capitalization?
Market Capitalization is the valuation of the company based on a share price with the outstanding equity.
Also Read: Shares Investment Guide 2018 (Beginners)
In other definition:
The value of Market Capitalization revels the holding of the market in percentage by the company.
The percentage of people willing and interested in buying the product of the company.
In the above example, you can see the percentage interest of the people towards the Market Capitalization.
The Question arises “Which is the best Stock to invest in?”
If you look into the Data the company percentage is above 100% are the companies showing better results of sales as compared to market capitalization, the people trust the company more then the market cap.
HS India is a good example of Stock Selection Strategies under comparison of Sales % with Market Capitalization.
Chapter No 2.
Everybody always heard the word “Dividend”
What is Dividend?
The dividend is part of profit share company distribute among shareholders.
Paying dividend is nothing to do with the stock price trading in the Stock Market. The companies paying a dividend to the holders of the shares possess a special place in the heart of the investor.
Dividend percentage boost the profit percentage of the investor, stock selection criteria consist of the selection of companies paying a dividend to the investors.
Every Investor is happy when they get some more money in their pocket in the form of a dividend.
In the above scenario, the companies paying dividends with a higher percentage are considered good picking stocks for beginners.
Chapter No 3.
In this Segment, best stock to buy is the one which generates more profit by less expenditure, this is a general and most understandable formula for the common and beginner in stock trading.
If you look above, you see the difference between two companies (red circle) – KDJ Holiday & Gujrat Hotels.
The purpose of this exercise is to bring you near the facts that some companies expenditure is more than the expenditure of other in the same industry, that means the company running their expenditure lower then the other company reserve the potential to grow and also have the potential to improve their Operational Profit Margin.
Maybe there is a reason behind the low expenditure is a location.
Sometimes the location provides benefits to the companies in the form of cheap labor, Government Taxation policy and many more, during stock analysis you must consider this point.
Chapter No 4.
Operational profit Margin is one of the important ratio analysis amoung fundamental analyst which provide the investor which company operation among the industry is remarkable.
If you look at the results of some selected companies above, you will observe the OPM of Westlife Develop which is (-229.32) this figure is out of the question, the sales are also almost zero and the expenses are higher then the sales.
If you look at the Net Profit it is also in negative figures.
The performance of Gujrat Hotels and Bay Isl. Hotels are remarkable but you can not jump to the conclusion of companies performance because the sales are very Low.
This company will be expected to perform in the future if the sales increases,
Also Read: What is Dividend Adjusted PEG Ratio
The question arises:
Why are sales very low?
There are several reasons behind this, will decision further.
If you look at the performance of Sinclairs Hotels the OPM is 42.65 which is good and the net Profit as compared to Sales is also good. Sinclairs Hotels seems best stocks to buy from the above list as per OPM.
Chapter No 5.
At the beginning of the article, I mentioned the sources of Company Income.
Income from other sources!
One portion of the Income of the company from other sources consist of interest received investment.
The investment made by the company in other company shares, mutual funds, the property is not the part of Business, but it was done to accumulate the money is diversified form.
You must look into the portion of the income from other sources, that how much interest from investment company earns in FY.
Chapter No 6.
Anther Key factor “How to pick stocks” is:
Debt to Equity Ratio
What is Debt to Equity Ratio?
Debt to Equity ratio is very easy to understand and on the other hand very important ratio to grab the company from the bucket, having debt free or very low debt.
It’s natural if I am running a business with no liability or Loans, I don’t have to pay any interest and I am worried free. I think of growing my business instead of paying my Lons.
Debt is basically Long Term Loan and Short term Loan from Banks or other financial institutes. If the company run there business with huge Debt on their shoulders, there might a chance of risk in the company.
What is the formula for calculating the debt-to-equity ratio?
Debt-to-Equity ratio = Total liabilities ÷ Total shareholders’ equity
Stock Picking Strategy also consist of ratio analysis which is a very popular and fruitful tool for the investor to get pick the stocks in the industry. Stock Charts technical analysis is technical stock screener bring the investor to take the right decision of selection of the company.
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Minor points to remember while Stock Selection Strategies
Easy to understand
You must go for the company, fairly straightforward, the business model or understand the industry knowledge. You must avoid investing in the company which already shows massive growth in the share price. Always try to find out the company which was way to understand their management decisions, account patterns.
You must have some portion of your investment in the reputed company, which itself have their brand name and people trust the company and the management decision, Those company also provide the good amount of dividend to the shareholders. If you look into the company which is best performers there is one thing in common what is BRAND.
Past Performer of the company
Some investor analyses the company future performance with the past performance, The performance of the company depends upon so many factors, If the management is good, there is huge demand of the product or services, but economical condition doesn’t support the company, the performance if bad, that doesn’t mean the future performance of the company is not in favor of the investor.
As discussed above, the companies in which dividend yield is good and improving every quarter helps to boost your investment amount. Those company also reveals the management trust towards the investor.
You must have the art of climbing on the top and dive to the bottom of the companies financial health, You will get the financial results like balance sheet, P&L account on the company websites. The financial results provide you the valuation of the company, whether the company is overvalued or undervalued.
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Stock Valuation tool
There are several valuation tools available in the market, you can aware of it, Financial ratio’s like P/E ration, EPS, dividend yield and many more, these tools help you find an undervalued company in the particular Industry. You also compare between different companies in the same industry.
Not only this strategy you must also aware of the timing of your investment and market condition.