Sensex crosses 19000
Five beta stocks to buy as markets rally
Book profits and wait for correction.
All of us have seen such news items in newspapers and financial information websites. We want to invest in stocks but are apprehensive as we are not very sure how to go about it. Many of us have also burnt our fingers with some bad investment in stocks and do not dare to enter the markets. But all of us have heard of acquaintances, friends of friends, distant relatives striking gold time and again in the stock markets. It is also true that equity as an asset class generates the highest returns over a period of time.
We are not going to give you a magic formula to make pots of money in the stock markets. We will equip you with some basic information that you should have to analyze and then decide whether to invest in the stock or not instead of relying on tips.
- You have to understand what the company does. During the IT boom, a lot of companies were renamed with new names that had the words IT or Technology to cash in on the market rally of the IT stocks. But it did not necessarily mean that they were in the IT business.
- You have to understand how profitable the company is. This can be found in annual reports, quarterly reports. There are many reliable websites that give this information. Find out the company’s revenue, costs, profits and look out for indicators that would help you to know that all may not be as well as shown by the reported figures
- Determine the company’s value. You have to find the right value of the stock that you are planning to buy. Compare the book value of the stock to the market value and see if the price one is paying to own the share is correct. Check the following parameters –
- Earnings per share (EPS) - The part of a company's profit allocated to each share of common stock. The EPS serves as an indicator of a company's profitability. When the EPS of similar companies are compared, it gives the comparative earning potential of the companies. On a very basic level, a higher EPS indicates better potential for upside.
- P/E ratio - The price to earnings (P/E) multiple or ratio is the most popular indicator used by investors to check the value of the stocks. It is the ratio of a company's stock price to its earnings per share. It helps to measure whether the stock is cheap or expensive. On an elementary level, a lower P/E indicates the stock is undervalued and will appreciate in the long run.
- Return on Capital Employed (ROCE) – This figure helps to measures the returns from the capital employed. It indicates the efficiency and profitability of a stock.
- Find out details on the management of the company by studying the website, annual reports etc. Check the background, experience and track record of those who are on the board. This also helps you determine the company’s growth potential.
- Once you are comfortable with the fundamental analysis, you can start with technical analysis which studies the supply and demand for particular scrips and comes up with a market trend. It helps in determining price movements.
- Spread out your risk across sectors and types of stocks. You should always adopt investment strategies that take care of your risk.
Ideally, the Financial Planners recommend investors to channelize their investments in to Equity Markets through Mutual Fund route only. There are various advantages here. Most importantly, as an individual investor, you have limited ability to track the specific stock and take necessary actions on time. If you still like to invest directly in stocks, it may be worth studying some of the greatest investors. There are many books that one can read. One of our all time favorite is "One Up on the Wall Street" by Peter Lynch. While this is largely in the US context, the underlying thought process can be applied globally.
Team Getting You Rich