a Site on personal investments

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Introduction

Why to Invest

Power of compounding

How & where to invest

Stock market

Misunderstandings

Astounding returns

Guidelines to invest

Check parameters

When-to-buy, when-to-sell

News update

References

Mutual funds

Check parameters

When you have decided to invest in stock market, how to choose the company out of more than 5000 listed companies. Following parameters you have to look at, analyse and evaluate and then choose the company. After buying also you have to track these parameters continuously. These ideas are learnt after so many years of hard, tough & expensive experience.

You have to consider all the parameter though certain things you can afford to ignore in some cases.

These data you can get from News papers, magazines, web sites etc. Some references have been given in other part of this website. (See Reference links)

Anyway, how much a stock rises or how fast stock rises depends ultimately on current, future earnings of the company. This is basic. When this is fully accounted in the stock price, investors tend to book profit thereby stock prices start falling to small extent this is called market correction. This is good and healthy for stock market. Buy at low sell at high is the logic. 25% of profit is moderate. The target price of the stock depends on what parameter is driving the stock price & how much steam is behind it.

Quality of management	Genuine Aggressive & growth oriented Investor friendly Good corporate governance Knowledgeable, professional & educated board of directors
Market position	Market leader – good buy in long term If the company is monopoly in the market - good New Start-up Company will not be market leader yet you can buy if other parameters are satisfied.
Growing sector	Sectors having potential for future growth (software, telecom, infrastructure etc) Sector at infant stage is a very good bet in long term (aviation, biotech)
Growing company	Company should have had stable growth in the past (like 2 to 4 years Growth shall be in sales, profit, operating margin.
Size of the company	Big company will have good price stability & moderate rate of price growth. Small companies may grow/fall fast. Stock prices also move like that.
Liquidity	Average Number of traded shares should be adequate (more than 10000). Otherwise you may not find a buyer when you want sell the stock.
Company on expansion	Capital expansion Geographical market expansion Diversifying product portfolio Market penetration Entering foreign market
Earning Stability	Very crucial & foremost.
Capital holding:	If the stocks are held by renowned Mutual funds, financial institutions, foreign investors, it means they have studied and selected. It is a very good, positive indication for you. If above institutions increase/decrease the stake follow it but don’t get too much carried away by their short term action. Promoter holding: if it is medium around 40 to 60 %, it is good. It means they have interest, confidence in the company.
National policy & Budget	The current, future policy or Budget of the country may favour, encourage certain industry (software, power, telecom, construction etc) & allied industry. Whether the industry is controlled by government Regulatory authority. Government decision to control the price of the product/service will affect the stock price. These things may be of short or medium or long term phenomena.
Dividend pay-outs	Company which pays dividend regularly is liked by the investors
Time frame	How long will you hold the stock? Some stocks (small company, lesser known, unstable performance) may good at times. They may bring loss in the long run. Always good company considering above parameters will fetch good returns in the long run ( 2 or 5 or 10 years)
Valuation or Price Earning ratio	Means how much bucks one has to pay to get 1 unit earning per 1 share Price earning ratio P/E = Stock price/Earnings Per Share Most crucial parameter. If it is too high, the stock is expensive. Compare with peers of the same sector. High growth, good company will have high value 30 to 40 (telecom, software, pharma ). Yet it is justified considering its future prospects. Each industry will have different average P/E depending on future prospects. Normally when a stock reaches high P/E ratio price starts falling which is called correction (due to profit booking)
Equity size	This is number shares that entire market capital consists of. Less equity (10 million) means rapid movement of stock price. Large equity (>100 million) stable stock price. Extent Rise/fall will not be too much. In any case one should not forget about liquidity
Book value	Actual value of companies assets/ No. of shares. Price/book ratio value vary with industry. Compare with peers of the same sector. book value - Less for more skill based, knowledge based industry Book value – more for Capital & infrastructure intensive industry Stock price under book value can be considered for buy.
Operating margin (OPM)	When OPM of the business increases stock price will go up. When raw material costs goes up profitability reduces hence stock price also.
Economic Data	The economic data announced by Govt. affect the market in short term & medium term. GDP growth : high – positive Foreign Exchange reserve : more is good Interest rate: less is good.