Investing is simple, but not easy. Statistics reveal that a majority of investors lose money in the stock market, the most common reason being lack of basic knowledge.
We all know that stocks, if chosen well, can create wealth beyond expectations. One well-picked stock can change one’s financial destiny. So it is natural, if not obvious, to want to pick that elusive multi-bagger.
There is a surfeit of information (books and websites) which can help you learn how to invest. The sheer volume of published wisdom is enough to rattle the uninitiated. Instead of being put off by a mountain of alleged knowledge, one can start with a simple checklist. This can be your common sense guide, your founding principles and your no-nonsense criteria in the journey of stock picking:
➡ Business quality, history and future
Most retail investors ‘invest first and investigate later’ when prices fall! It is vital to have at least a basic understanding of the business, and whether it has durable franchise or customer loyalty. It may help know how a company performed in an unfavourable period, how its management responded to the challenges. This will help gauge whether the business has a future worth investing in.
➡ Market share
Companies can witness short-term growth by undercutting the competition, but this may not be sustainable in the long run. These businesses may do well when there is a general upturn in the economy, but will be unable to sustain profits once the tide turns. One aspect to be taken into account is that companies should have a sustainable competitive advantage over their peers.
➡ Improving margins
It is important that a company grows profitably. Companies with robust margins are able to withstand temporary head-winds in the economy or their own industry. As the company grows, economies of scale should help generate higher margins, making it more profitable. So, prior to investing, a close look at the company’s margin profile is vital.
➡ Management integrity
There should not be an iota of doubt about the integrity of the promoters and management. Even a good company in a great sector can destroy your capital if badly managed.
➡ Promoter holding
High promoter holding tells you that promoters have more ‘skin in the game’. Decision making is in the hands of promoters, and external influence is minimal. The downside to a high promoter holding is that low free-float stock makes the price vulnerable. Relatively small transactions (buying or selling) may influence the stock price disproportionately.
➡ Dividend policy
High dividend-paying companies are always attractive. Investors have faith in them as they are getting regular returns on their investments. Look for a company with high dividend yield. An increase in the company’s profits should see a simultaneous increase in dividends. .
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