Investing in stocks one of the best ways that lead to the creation of the wealth. It can offer good returns but this form of investment has a certain amount of risk and uncertainty attached to it.
The market volatility can be challenging for a new as well as a veteran investor. It is difficult for investors to pick out the top shares that will perform well in the market and provide a sizeable return.
Generally, investors who do not conduct enough research about the stocks and invest in them fail to garner decent income from their stock investments. One of the key factors an investor needs to check before investing is to select the right companies, understand their different portfolios, and at the end look at the fundamentals.
Let’s take a look at the important things that investors need to consider at the time of picking up the right stocks:
● Look at the company fundamentals
First and foremost, an investor needs to understand that a stock is essentially a company. So, when you invest in a stock you are technically investing in the company. Hence, as an investor, you need to look out for the fundamentals of the company. You should conduct a thorough research of the company before investing in it.
Try to understand the business of the company and know about the industry it belongs to. Keep a tab on the cash flow of the company as it is more important than the income statement. A higher operating cash flow suggests that the company can sustain the capital investment.
Also, you should take a look at the balance sheet and profit and loss statement as well. Simply, following the price trend and history of the share is not enough as you need to consider the future growth as well as the potential of the company.
● Understand the different ratios
Every investor should understand a couple of financial ratios of the company. They should check the P/E (price-to-earnings) ratio of the company that suggests how much stock investors are paying for each rupee of earnings. It is a measure which indicates if the company is overvalued or undervalued. Another ratio that should be considered by investors is the D/E (debt-to-equity) ratio, which shows how much debt a company is using to finance its assets in relation to the value of shareholders’ equity.
● Profitability and financial risk
Even if the company is doing great sales, you should go the extra mile and check if it is profitable or not. Investors should check how the company is growing profits and also look out if it is going for a change of the business model.
Ideally, the company you are investing in should have better margins as compared to its peers. Moreover, as an investor, you should check if the company can handle the debt. A company’s financial risk is also another determining factor that you should consider before buying the shares.
● Management & governance are important
A company needs to have a strong management base to take the business forward. Hence, look out for companies that have a quality management team that has a strong vision for the company’s growth. Moreover, the company you are investing in should follow high standards of corporate governance. A company that rigorously follows the highest standards of transparency and disclosure get premium valuations in the market.
● Future expansion plans
The company in which you are planning to invest should have a defined expansion plan that leads to an increase in the earnings. This eventually results in a higher share price. Look out if the company is working on launching a new product as it could also have a positive impact on the share prices.
At the same time, you should check if the company you are investing in is likely to face a tough competition from not only the existing peers but also from new entrants. It is important to see, how the company has positioned itself against the competition.
● Keep a tab on market cycles
All investors should understand that just because a stock performed a particular pattern, it will continue to follow the same pattern every year. The stock market is prone to fluctuations based on external factors like political stability, social unrest, elections, inflation, interest rate, and so on. Stocks, as well as assets, have unique cycles and you should keep a tab on these cycles.
● Time the market
An investor should know that they cannot predict the market correctly and consistently every time. There are several investors who have lost their money instead of gaining while attempting to time the market.
Instead, investors should focus on building their investment strategy and tweak it according to the market conditions. You should have a financial goal before you start investing and it helps you project the amount of growth you can expect to achieve your goals.
At the end of the day, it must be noted that in order to be a successful investor you should follow a disciplined investment approach. Also, it is important to have patience and realistic expectations from your stock investments.
Stock market investment requires a little bit of hard work. Finally, you should remember that all your stock investment decisions are derived after giving it a rational thought. Stay away from emotional decisions and market gossip in order to receive sizeable returns from your investments. There is no harm in taking the help of a financial expert regarding your investment decisions. If you think that stock market investments are not your cup of tea, you can always look consider investing in mutual funds.
If you start investing early it will help you with the creation of the wealth. You can get more information on Bankbazaar.com about various kinds of stocks and mutual funds. Going through them can help investors a great deal.