what factors to consider when buying stock

What to consider before buying stocks?

Here are seven things an investor should consider when picking stocks:Trends in earnings growth.Company strength relative to its peers.Debt-to-equity ratio in line with industry norms.Price-earnings ratio can give an indication of valuation.How the company treats dividends.Effectiveness of executive leadership.More items...

What is the most important factor for buying a stock?

Some of the most important ratios to consider before buying a stock: Price-to-Earnings Ratio (P/E Ratio)- This ratiocompares the stock's price with the company's earnings per share (EPS). For example, if a company is trading at Rs. 20 per share that produces EPS of Rs.Mar 22, 2022

What are 3 factors you should consider before investing your money?

These are:Compliance.Liquidity.Volatility.Cost & Value.Return.Compliance– it may seem obvious that a potential investment is compliant, and from an investment committee perspective it is. ... Liquidity– We believe this is one of the most important factors for all international and expatriate clients.More items...•Oct 18, 2019

How do beginners invest in stocks with little money?

One of the best ways for beginners to get started investing in the stock market is to put money in an online investment account, which can then be used to invest in shares of stock or stock mutual funds. With many brokerage accounts, you can start investing for the price of a single share.

Why is it important to compare companies?

When comparing companies for investing, it is essential to make sure they are in the same industry and have the same financial structure. If they don't, it isn't a good comparison. For example, two companies each have $100 in assets.

What is intrinsic value?

Intrinsic value considers the company's ability to generate free cash (cash remaining after all the bills are paid and current debt obligations satisfied) over time. A stock might be worth buying if its intrinsic value is greater than its market value.

What is free cash?

It is money the company can use to fund expansions, buy other companies, pay dividends, or save for future use.

What is a strong free cash flow?

A strong free cash flow is an important signal that the company has a competitive advantage over competitors. How big of an advantage (or economic moat) the company has factors into deciding how strong the company's future looks.

What is net margin?

Net Margins. A company's net margin is simply net income divided by sales. What this tells you is how efficient the company is in wringing profits out of sales. For example, some companies in specific industries (such as grocery stores) have low net margins and must drive a lot of revenue to generate profits.

Who is Ken Little?

Ken Little is an expert in investing, including stocks and markets. He is the author of 15 books on investing and his career in finance includes roles as business news editor and VP of Marketing for a financial services firm. Read The Balance's editorial policies. Ken Little. Updated October 31, 2020.

1. Time Horizon

Firstly, you need to decide the time horizon before buying a stock as it plays a crucial role in deciding whether to buy that stock or not. Your investing time horizon can be short term, middle term or long term, based on your financial goals.

2. Investment Strategy

Before buying a stock, it is important to study various investing strategies and choose the one which suits your investing style

4. Stock Performance compared to its peers

Investors should also check how the stock has performed in comparison to its peers, websites like StockEdge and Google finance help the companies to compare with their peers.

5. Shareholder Pattern

Investors should check the shareholding pattern before buying a stock.

6. Mutual Funds Holding

When a stock is held by many mutual funds, it is generally considered a safer stock compared to the other stocks which are not held by any mutual funds.

7. Size of the Company

The size of the company that you are considering investing in plays a crucial role in the amount of risk that you want to take for buying a stock.

8. Dividend History

Dividend stocks are known for giving a part of their profits to their investors in the form of dividend payments.

Check the Growth in Earnings of the Company

Have a look at the net income of the company over some time. Explore the income trends. Is the earning witnessing growth over time? It is fine even if the income growth isn’t exponential. Look for a company that has a gradual and consistent growth in income over time. Such companies will surely give you a good return on your investment.

Look at the Balance Sheet

The balance sheet is an essential component of the fundamental analysis you perform for the company. You get an overall idea of the financial stability and strength of the firm. The balance sheet of a company provides the investor with information about the assets owned by the company, the shareholder’s equity, and the outstanding debt it owes.

Analyze the Debt-To-Equity Ratio

All businesses have some debt or the other in their balance sheet. Even the most successful companies have liabilities. But if a company has too much debt, it is a big red flag for an investor. You can compare the debt-to-equity ratio when you analyze the balance sheet of the firm.

Consider the Size of the Company

Your risk appetite should determine the size of the company you would like to invest in. Always compare your risk tolerance with the magnitude of the company. Publicly traded companies have some market capitalization which determines their size. The market value of the total shares of the company is also a good tool for figuring out their size.

What is liquidity in investing?

Liquidity of an investment refers to how quickly the investment can be exchanged for or converted into money. Liquidity can be through sale on the stock exchange or redemption on maturity of the instrument.

What is the market capitalization of a company?

Turnover or revenue from business operations. Market capitalization, which is the aggregate market value of all of the company’s shares. Net profits of the company after tax, earnings of the company before deduction of any interest, taxes, depreciation or amortization, also called EBITDA.

What is FEMA in India?

Investors who trade in Indian stocks but are not Indian nationals need to ensure their investment complies with provisions of the Foreign Exchange Management Act (FEMA). The transfer of capital from and to foreign countries by nonresident investors, also called repatriation, is highly regulated by FEMA.

Who is Aashika Jain?

Aashika Jain Editor. Aashika is the India Editor for Forbes Advisor. Her 13-year business and finance journalism stint has led her to report, write, edit and lead teams covering public investing, private investing and personal investing both in India and overseas.

What is expected return?

The expected return can be in the way of interest or dividends as well as capital gain or loss. In order to minimize the risk associated with your investment in the type of security that you select, follow basic steps before investing ...

What is investment portfolio?

An investment portfolio refers to the basket of all the investments made by the investor and a constant monitoring of such portfolio is required. Financial markets are dynamic in nature and timing is of the essence for making investment as well as selling or liquidating investment.

What is STT in stock market?

Securities transaction tax – Securities Transaction Tax or STT is a tax which is levied on the purchase and sale of such securities listed on the stock exchanges. STT is usually levied at 0.1% of the transaction value in case of share transactions and 0.001% transaction value in case of mutual fund transactions.

What is buying stocks?

Buying stocks is a means of investing in companies in which you want to own equity. These ownership positions are issued in instruments called stocks. People purchase stocks through stockbrokers, agents, the company itself or they can be traded individually. It is important to consider not only the company you want to invest in, ...

What is the best indicator of the stock market?

An important indicator for the stock market is the gross domestic product (GDP). This is the value of all goods and services produced in the United States. This is regardless of who actually owns the resources used.

Is utilities a good dividend?

Utilities are a good example of stable stocks that pay a good dividend. The price/earnings (P/E) ratio is an important indicator for buying stocks. Dividing the price of the stock by the company’s annual earnings per share easily arrives at this ratio.

Is growth stock a long term investment?

They will always be needed, regardless of the economic environment. There is an element of risk in all stock trading, which is often considered a long-term investment. On the other hand, if the markets are rising and positive, growth stocks might be a consideration.

1. Comparison with peers on fundamentals

Return on Equity, Return on Assets, P/E, Margins, Debt, RoCE etc are key factors to look at while buying the best stock in a specific industry.

2. Stock Performance compared to peers

How has the stock performed in comparison to its peers, websites like moneycontrol.com and google finance are great to draw some comparisons.

3. Mutual Fund holding

A stock that is held by multiple mutual funds is generally considered a safer stock compared to a stock not held by any mutual funds. BSE/NSE, Economic times, Value research online, Screener and Moneycontrol are good websites to look at other mutual funds holding the stock

4. Shareholding Pattern

A high promoter holding + High Domestic Institutional Investor holding + High Foreign Institutional holding is a win win

5. Financial Performance

Here you should look at the revenue and profit year over year. We would advice you to refrain you from looking at quarterly numbers.#N#Related – New era of short terminism

6. Analyst reports

If more and more analysts are covering the stock, that is a good sign as well. Edelweiss, Value Research, HDFC, ICICI, Morningstar are few of the analyst companies. There is no dearth of individual analyst too. Moneycontrol is a great way to look at all the analyst reports a stock might have

Corporate bonds

Not every company will have this but in the case of REC, this is available so we will talk about it

Check The Growth in Earnings of The Company

• Have a look at the net income of the company over some time. Explore the income trends. Is the earning witnessing growth over time? It is fine even if the income growth isn’t exponential. Look for a company that has a gradual and consistent growth in income over time. Such companies will surely give you a good return on your investment. A good trading applets you view the growth ea…

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Look at The Balance Sheet

Analyze The Debt-to-Equity Ratio

Consider The Size of The Company