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How To Pick Good Stocks In Indian Market?

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New investors are always confused about how to pick good stocks that can give high returns. If you choose good stocks, only then you can make good profit, and if you choose the wrong stock, then you can have a huge loss.

Most stock investors open an online trading account and Demat account with a credible broking company before starting the stock market. After this first step, every investor’s success depends on choosing good stocks.

The most important thing to succeed in the stock market is market terminology and stock analysis. So to become a professional investor or to pick good stocks, you have to keep several things in mind.

How To Pick Right Stocks

How to understand which company’s stocks will be better to buy while choosing stocks:

Income stability

Companies should choose which has had consistent revenue growth over a period of time, along with regular profit improvement.

It can be said that the financial and operational stability of this company will be very high. And the market and investors want stability and earnings visibility.

Valuation

Invest in companies with decent valuations. Stocks with high price/earnings (P/E) ratio are not always bad and low P/E ratio does not mean that they are good stocks either.

There are many companies that do not have a real business that justifies their valuation.

There are a lot of companies that are well-managed and are available at reasonable valuations. For investors, you have to decide if the company is worth the price.

In a falling market, valuation is a big factor because it is the safe zone. Avoid companies where valuations are excessive. Low P/E stocks are not always value buys.

Good management

Companies with good management and proven track record can usually get out of any problem quickly. Good management

Keeps a company ahead in terms of products and technology. If the sentiment improves, the recovery rate of such stocks is high.

Avoid High Debt companies

All companies have more or less debt in the market. It is important to grow the business.

But, in today’s challenging business market, if a firm has an high ratio of debt to equity that it is likely to be unable to pay the obligations of its debt.

If the company’s strained and stretched finances, it might be a risky bet for you.

Shareholder Friendliness

A company can be called shareholder-friendly only when it is seen that the company is paying regular dividends to its stakeholders.

If the company gives stability and reasonable dividend payment over the years, it means that the company is fairly confident about its business.

Choose Market Leaders

Select market leader companies first; a company that has grown consistently for at least 8 to 10 years. If it’s more, so much the better.

Things to keep in mind before choosing Stocks:

Set financial goals first

Investing is not a one-size-fits-all process. New investors are usually concerned with growing their investment portfolio on a long-term basis.

Experienced investors are interested in capital preservation as they plan to exit their holdings upon reaching retirement age. Therefore, it is very important to set financial goals in selecting a company for investment.

Identify Risk Tolerance

Investors have different ways of investing. They have different risk and return profiles. Before investing in any stock you need to understand your risk tolerance.

Buy stock by understanding the company

One of the greatest investors, Warren Buffett, said, “Never invest in a company you don’t understand.” Believing in hype blindly is among the most frequent reasons that investors make a loss.

A good understanding of stocks can help you make the right decision in terms of buying, holding or selling stocks. Therefore, only after doing enough research can you understand which companies to invest in.

Avoid Chasing High Yields

Dividend investors often choose high dividend yield stocks to invest in, but these can often be unprofitable, stagnant company holdings.

A dividend yield is determined by dividing the dividend amount by the price of the share. When a stock’s price begins to decline, a declining yield can look momentarily higher.

Understand Financial Ratios

Generally, a financial statement contains details of the company’s profit and loss statement, balance sheet, cash flow.

Based on this document, investors get an idea of a company’s management skills, past growth, profitability, financial ratio and financial stability.

In case of portfolio investment, 8 basic ratios are used to choose equity. These parameters have been helping investors to make better investment decisions in the stock market sector for many years.

8 financial ratios need to be seen before buying stocks:

  • Earnings per share (EPS) – has been increasing for the last 5 years
  • Ratio of Equity to Debt – should be lower than 1 (preferably debt <0.5 or 0.)
  • Return on Equity (ROE) – should be greater than 15 percentage (average of the last three years)
  • Price-to-Book Ratio (PBV) – Very low when as compared to industry average
  • Rate of Price-to-Earnings (PE) – Low when as compared to other companies and industry average
  • Pricing to Sales Ratio (P/S) – A smaller value is more effective
  • Current Ratio – should be more than 1
  • Dividend – has been increasing for the last 5 years

Additional Important Tips

Apart from the above-mentioned 8 stock-picking tips for share picking in the Indian market, there are some additional tips:

Invest in mid-cap companies to get high returns

Mid-cap companies are able to provide better returns. They have the potential to develop into a large-cap firm in the future. Their growth rate potential is high compared to already saturated large caps companies.

Also mid-cap companies are well capitalized so they stay away from debt. In the end, it could be stated that a high mid-cap with growth can turn into a multi-bagger company.

Cheap is not always good, and expensive is not always bad

When investing in high growth stocks, occasionally high prices and high PE ratio shares are a good investment. Some growth stocks have good future potential and can give multiple returns.

On the other hand, when choosing an undervalued stock, you need to find out why the stock is undervalued. Many companies sell shares cheaply because they don’t have much future growth potential.

Don’t judge based on past performance only

Do not rely solely on past performance to select a stock to invest in the Indian stock market. Past performance does not mean that the future performance of that company will be equally good.

Future growth is dependent on a variety of aspects of the company’s management, competition and industry, economics, etc. Always look at both quantitative and qualitative aspects of the company before investing.

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