Tue, Aug 22, 2017, 02:27 PM
These days, many are interested in investing in shares. But very few know about the stock market. Among them, experts who can tell which stocks are profitable, are limited. There is a method by which those interested in investing can follow easily. Just follow the principles adopted by experienced investors. See what they are
Shares should ideally be of long-term value. They should be available at a much lesser price than what they actually are worthy of. Sometimes the value of shares falls suddenly, despite the companies doing well, revenue and profits-wise. This might be due to market loss or some national or international issues. Then they are available at a very low Price Earning Ratio (PE ratio). Sometimes they are quoted less than the shareholder book value. Such shares are safe to buy. Moreover, they should regularly reap dividends. In case shares are quoted less than their actual worth, but the company is not paying dividends, clever investors will not buy them. The criteria for such investors is the dividend that the shares earn. If they have to pay dividends, companies need to earn profits. Any share is like gold, if it is earning dividends regularly and the dividend amount is increasing year by year.
There should be a regular rise in Earnings per share (EPS). The dividend that is earned by a share, after a company distributes the profits, is EPS. Examine how the EPS has grown, for over, say 10 years. If the share is stable, without growth or depreciation, it is not worth buying. For example, a share currently selling for Rs. 10 might fall, a year later. Then unexpectedly it rises a year after that. Such shares are not worth investing in.
Clever investors do not buy shares of newly listed companies. Let it of any big company. You can follow this principle blindly. Investors stay away from shares of newly listed companies, even though they behave as mentioned above. Because, for investing in any share, it is necessary to check the performance of the company through the years. The progressive history of its revenue, profits, EPS etc. should be known. Only then you can decide whether to invest in it or not.It should not be competitive, but should rule the market. Invest blindly in such shares. Companies that face severe competition will have to forego some of the profits in some situations. As such the share value is down. It goes without saying that a company can pay dividends only when its profits keep increasing. Select a share that is the king in its sector, with less or no competition.
Shares of companies that are not very popular for products, services or trades, are not suitable for investments. Let us say a new fruit juice company has entered the market. It will take some time for it to earn some reputation in the market. It should be able win customers, with its value. Only then will the product survive. Clever investors bank on such shares that have earned good response from the customers. They do not take risks. Investors should ensure they know everything about the company and shares that they choose to buy. For example, take ITC. This company is the largest in cigarettes market. A majority people know about this company, that is manufacturing Fast Moving Consumer Goods (FMCG), food products and many others. The business of such popular companies is always flourishing as their products are being sold perennially. This should be noted before investing.
Another important factor to be considered before investing in any company, is about its debt position. Calculate the amount of loans it has to pay, over and above its gross capital. Investors remain aloof from shares of a company that is in debts, amounting to several times more than its gross capital. Any company has to take loans, for business purpose. However, this loan amount should be much less than its gross capital. Otherwise, a major part of its profits will be spent on clearing interests on loans. So companies with least debts are suitable for investing.
The profit margin should be high. Certain companies have a very less profit margin. Example: Aviation or Telecom. These sectors gain less and face more competition. Investors do not choose such companies.
Timing of buying and selling shares is also important. Which means, buying the shares when their price is less and selling them off when they reach the maximum. Avoid impulsive actions or going by feel good factor. It is not right to buy assuming that the stocks will rise or sell thinking that they will fall. Also, do not compete with others in buying shares. Company fundamentals should be right. All the above mentioned qualities should be present.Before buying any stock, it is important to know, why you are buying it. If the answer is in accordance with all the above mentioned guidelines, then you can go ahead.
A good management is necessary for a company to rise and progress. Which means, transparency and sincerity. You can expect high rate of success from promoters who are well experienced in their field.
Warren Buffet principle
Show interest in buying shares when others are afraid. Sell shares when others are enthusiastic. This is a principle followed by many stock market experts, who follow Warren Buffet. He has learnt through experience to sell when everyone is buying and buy when everyone is selling.