Sunday, January 22, 2012

Five Critical Parameters for Selecting a Stock

Wanna select a stock for investment without much hassle. Feel it is indeed difficult. Not sure if you will be able to do it or have a feeling that you need to be an expert in finance to select stocks for investment. It is time to have change in the thought process. Selecting stocks for investment is one of the easiest thing. Let us look at parameters that you need to investigate before you buy a stock:

1) Look at the Business in which a company operates: It is important to understand the business in which a company operates. If you do not understand the business, do not buy the stock. Believe me, it is very easy to understand business and requires just common sense approach. Look for example India. India as an economy will grow and this will result into growth of companies. These companies will issue new debt and equity instruments. Since these instruments will need to be rated, the country will require credit rating agencies. No wonder, I will like to buy one of the leading stocks in credit rating domain. No wonder, my first preference is CRISIL as a stock. Same logic can be applied for other stocks.

2) Look at growth of the Company: Two aspects of business growth are sales growth and profitability growth. The first is called as topline growth and second is known as bottomline. Go through profit and loss account of a company and you will easily find, growth data for these two variables.Look at compounded annual growth rate and deviations in growth over a period of five years. This will give insight into growth trend.

3) Be a long term Investor: It is better to be long term investor. There is no definition of long term and J.M. Keynes once said that in long run we are all dead but it is better to hold stock for two business cycles which can range from 7 to 10 years.

4) Look at Return on Equity: This is called as the return of owners of business. This data is available for companies on internet and to find it yourself you need to use the formula: ( PAT/ Shareholders Capital plus reserves and surplus). This will give an indication about how much return shareholders are generating for their own investment.

5) Follow the business : Though you should invest for long term, you must be aware about how the business is doing. This is in order to avoid any disastrous with your investment.

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