Trading Guide: 8 indicators investors must conisder before buying a stock

Viidyes K Totare, MD & CEO at Archers Wealth Management Pvt Ltd, shares his expert tips to consider before investing in stock market

Just when you thought that a popular stock is about to take its highest jump and you pour big investment only to realise later that it has cut out your pocket.

Or just when you had a gut feeling that one of the major stocks in your portfolio is about to crash and you sell it out at a cheap bargain — only to miss a jackpot as it soars to its highest value the next year.

Well, these economic nightmares are not uncommon. There are people who are making fortunes in the stock market and then there are those who are losing their financial security and retirement dreams.

Have you ever wondered what makes such a dramatic difference?

Is it that people who make fortune are blessed with a Midas touch and those who loose are cursed by demons of bad luck?

Well, the simple answer is people who repeatedly lose, rely on thoughts, feelings, assumptions, gut feelings, trends, and rumours.

And, people who make it big consistently even when the market bites the dust rely on extensive research.

The more skilled you are at research the more profits you make even when the economy is crashing.

Now you may be wondering what should one research to separate the cream of the crop from the dead beats?

You see, we have a huge list of private clients who invest from a few thousand rupees to even crores every month and they completely rely on us.

And the only reason we have been able to give them over 20% to 40% compound profits is because of our ability to analyse a set of critical parameters before we make any decision.

For over ten years of doing this day in and day out and closely studying stock markets’ biggest winners and losers, we knew which parameters need more detailed research and which less.

Here’s an exhaustive list below that you should consider before you invest:

Let’s first start at the macro level

●    Industry analysis - Identify whether the whole industry is growing or slowing down

●    Business model analysis – Whether it has a sustainable earning model or it’s blowing investors’ money

●    Financial strength - Is the company in debt or stable or even better flourishing with reserves of cash

●    Management quality - How proficient and successful the leaders of the company are

●    Growth analysis - How has the company grown in the last 2 yrs., 5yrs. or 10 yrs.

●    Valuation - What is the total estimated value of the company

●    Target price - Is the stock fairly valued relative to its projected and historical earnings

Now let’s look at the micro level.  At this point you understand how fundamentally sound the company is to ensure future success.

The best way is to know the below financial ratios.

1. Earnings Per Share (EPS) – It should be increasing for the last 5 years

2. Price to Earnings Ratio (PE) – It should be lower as compared to competitors and Industry average

3. Price to Book Ratio (PBV) – It should be lower as compared to competitors and Industry average

4. Debt to Equity Ratio – It should be less than 1 (Preferably 0.5 or zero)

5. Return on Equity (ROE) – It should be greater than 15% (Last 3 Yrs. Av)

6. Price to Sales Ratio (P/S) – Smaller value is preferred

7. Current Ratio – It should be greater than 1

8. Dividend– It should be increasing for the last 5 years

If it is a listed company, you can easily find out a lot of this info on the company’s balance sheets and financial brochures available on their website under the investor section.

Now let’s move to a factor, that is the soul of a company’s long-term success — it’s products and services

Here are a few important aspects you should consider:

●    Understand products and services offered by the company

●    Product longevity - Is it a fad that will come and go or is it here to stay for 15-20 years from now?

●    Does the Company Have a MOAT - Does it have a sustainable competitive Advantage?

●    What and how is a company doing that its competitors are not?

●    Company’s debt structure, debt burden, provisions

●    Company’s management, their efficiency and qualifications

Now let’s look at certain information that is not only easily available on websites but is also critically important for their success:

●    Strategy & goals, vision, mission, and value of company

●    Length of tenure of Management

●    Promoter’s buying and share buybacks, corporate actions

●    Perks and compensations to staff and workers

●    Transparency of management

Well, if this sounds like you have been asked to solve algebra questions in class 5th, the answer is yes, investing in stocks is complex. It is as complex a subject as medical science or law.

You must constantly learn and upgrade. This is the reason people go to experts for help.

If you’re playing small and it is just a minor side hustle, then it’s okay for you to look at different analysis reports available live on various stock market analysis platforms — and make your decision.

But if you are investing big and investing frequently and you want to ensure your investment in order to enjoy soaring compound profits without an expert’s help, then you must be proficient at analysing these parameters. 

(Disclaimer: The views/suggestions/advices expressed here in this article is solely by investment experts. Zee Business suggests its readers to consult with their investment advisers before making any financial decision.)