The stock market might be an interesting place from an investment point of view, but at the same time also risky, especially for those people who don't have knowledge and experience about the stock market mechanism and its various aspects.
If you are also a beginner in the stock market, and mulling to start trading or investing, you need to be aware of various things. Though, people who are not graduates from the commerce field are not able to understand the jargon used in the stock market.
Before entering into this market, have some basic knowledge of the stock market that is freely available on the internet. And when you got some idea of the stock market, then you can start trading or investing with the help of experts. However, there are various things that you need to understand like how to choose companies and risk in investing in stocks.
Also Read: Golden Rules of investing in Stock Market
Things to Consider Before Investing in Stock Market
Though, there are various factors affecting the price of the stocks in the market. But knowing the necessary one is important as well as easy to understand. Being a non-technical person in the stock market, you need to know the key things that will help you to understand the company you are going to invest in and how to pick the best one.
#1 Understand the Nature of the Business of the Company
Before investing in any stock knowing about the nature of the business of that company is very important. Understand the business model of the company, what goods it is manufacturing or selling or what kind of services it is offering and in which industry or sector it is operating etc. You can gather such information from the company's website or online.
Moreover, how much market share company account for in the industry, its annual production capacity and what are its clients and manufacturing unit locations and quantity etc? This will help you to understand what the company exactly doing. If you find the company's business has the scope and demand in the market, you can invest in such a company.
#2 Perform the Economic, Sector or Industry Analysis
After understanding the business model of the company, you need to analyse the sector or industry economic scenario in the country. A sector with sufficient demand for products and services is also beneficial for a company operating in a similar industry.
While analyzing the sector, you will also get to the other competitors of this company operating in the market and accounting for a significant market share in the industry. This will also let you know how much scope of market share the company can gain in future if performed well and what are the regulatory norms, threats and other risks in the industry.
#3 Promoters and Management of the Company
A Company backed by a strong management team performs well in the industry with significant growth in the revenue and profitability of the company. Always check the promoters, their educational qualification and experience in that industry.
Most of the promoters of a company hold the major shareholding hence, they work as a chairman, CEO or managing directors of the company. And there are various other members on the board of directors of the company who all take strategic decisions for the positive growth of the company. Hence, always check the details of the top management of the company.
#4 Analyse the Annual & Quarterly Reports of the Company
As per the SEBI norms, all the listed companies are mandatory to report their annual and quarterly reports to the public or you can say to shareholders of the company. Hence, you need to check these reports that contain the performance of the company in the past years or in the latest three months to know how the company is performing.
In annual reports you can find detailed information about the company, its annual sales compared with previous years, its investments in the last year and plans like capital expenditure, new projects launch and acquisition of any company etc. This will help you to know how the company is doing and further how much potential it has to grow in the industry.
#5 Financial Performance Analysis and Ratio Analysis
While checking the annual reports and queerly reports you should check the financial performance of the company and compare the same with respective periods, like Year-on-Year or Quarter-on-Quarter growth in sales, operating profit and net profit etc.
While analyzing the yearly or quarterly financial reports don’t forget to analyse the operating margin and net profit margin of the company, whether it's improving or not, and what are the reasons for the decrease in the operating margins or net margins.
And if you have knowledge and experience also perform the ratio analysis, which will tell you the financial health of the company, its liability over the assets, its capability pay-off debts, its liquidity status and valuation of the latest share price of the company.
#6 Also Evaluate the Balance Sheet of the Company
The balance of the company is a very important section in the annual report of yearly financial reports. Gauging the assets and liabilities of the company tells the financial health condition of the company in which you are going to invest your money.
While analyzing the balance sheet, check the loan, debts or borrowings of the company. Investing in a highly debt-ridden company would be a risky decision. Check the assets mainly the fixed assets, cash reserve and investment of the company.
And you can use the debt-to-equity ratio to know if the company is capable of pay-off its debts or not. A high-debt company has to pay interest to the bank and earn a lower profit which is not good for the company and of course for the shareholders of the company. However, companies with high-profit margins may have high debts as they can pay easily.
Other Parameters to Check Before Investing in a Stock
All the above six are the key factors of the company that you must check before investing in the stock of any company. However, there are various other aspects you need to keep in mind while choosing s right company for the investment, let’s find out.
#7 Analyse Your Risk Appetite
While investing in the stock market, knowing your risk appetite is very important to choose the right company from the right sector. If you can take high risks with the expectation of high returns, you can invest in high beta or highly volatile stocks. You need to know how much risk or loss you can bear as there is no guarantee you always earn profits.
As, the stock market is one of the highly volatile places, where your money can go down within a fraction of a second if the market crashes and you don't exit from your positions in the stocks. However, during intraday trading such risks are high, but for long-term investment there are other risk factors like waiting period and fundamental factors.
#8 Time Horizon and Investment Strategy
Before you invest define your investment time horizon, and how long you can wait to get returns. According to that, you have to choose the right stocks that can give you returns within your time frame. There are three types of time horizons people usually consider while investing in the stock market – short-term, medium-term and long-term.
Short-term can be intraday, few days, few months or any investment can give the returns within one year. You can select that are suitable for intraday trading or can give you returns within one day, week or within one month.
While the medium term, the time horizon would be anywhere more than one year, say 3 to 5 years. Here you can pick the medium size companies growing fast and having the potential to grow faster and give promising returns to shareholders too.
Finally, the long-term investment time horizon is more than 5 years, where you can get the highest return compared to any other assets investment. For long-term, investment you can pick any company having a track record of good financial performance with the further potential to grow in various economic and market conditions.
#9 Performance of Stock in the Past Years
Growth is the price of the stock is the main motive of investment, but how much growth is expected or acceptable is more important. You should check the past performance of the stock price movement of the company, and how it grew in the previous years.
In terms of CAGR growth of total returns in the last 5 or 10 years and also compare this growth with the stock price of other companies in a similar industry. This will give you an idea of how the stock price moves with the growth of the company, if its movement is slower than other peer group companies, then you can pick another stock, but sometimes many companies give huge volume of dividends during the period hence, their stock price movement might slow.
#10 Analyse the Technical Chart & Other Indicators
For long-term investment, you have to use the fundamental analysis but for short-term investment or intraday trading, you have to use the technical analysis applied to charts like candlestick chart patterns and MovingAverages. Here you can apply various tools, techniques and technical indicators to find out the buying levels and points where you can book profits and exit from your position to earn the highest returns and minimize your losses.
You can apply the most widely used technical tools like RSI, Swing Trading, Bollinger Band, Fibonacci Retracement, Breakout & Breakdown and Support & Resistance to know where you have to buy or sell to book profits and exit timely from your trade positions. All the advanced trading online platforms showing the share price through charts also have the integrated facility to apply these tools on live data and decide where to buy or sell the stock.
How to Analyse a Stock Before Investing in India?
While discussing investing in stocks I think you got to know there are various parameters, tools and techniques that are used to decide which stock to buy. And fundamental and technical analysis are the two well-known techniques to analyse stocks while investing from different time horizon points of view.
Though, traders mainly used technical analysis for intraday or short-term trading, while long-term investors use the fundamental analysis to analyse which stock is better. Both fundamental and technical analysis have their advantages and disadvantages depending on the data availability and applications in various market conditions.
However, fundamental analysts also use the technical indicator to enter the best point while buy8ing a stock, and on the other hand technical analyst also check the fundamentals of the company or the latest news, sector news, corporate actions or company related any kind of updates before making any short-term trade position in the stock of that company.
Investing in the stock market from a company perspective you need to know your company, its management, financial growth and valuation of the stock. While from your point of view, the time horizon you can wait for returns and your risk appetite are the main points you need to consider while buying the stock of any company.
However, by checking the past stock performance of the company and analyzing the current levels through technical analysis, you can find out the buying point or selling point of the stock. And if you don't know how to apply technical analysis tools and techniques, you can take help from stock market experts having thorough knowledge and experience.
Moneysukh has such a team to analyze the stocks technically and fundamentally to recommend the best stock that can give the best returns in the short-term or long term. Moneysukh is providing trading and investing solutions in the stock market, commodities and currency markets with robust online trading facilities for all types of investors and traders across India.
It is offering a trading facility with a free trading account and a demat account for equity, commodity and currency trading with free tips or recommendationsand updates to book profits or exit from the trade positions at minimal losses.
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