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How to choose the right stock for investment?

How to choose the right stock for investment?

Many people come to the stock market with great enthusiasm and leave the stock market very fast. It is not like that as soon as you invest, you will become rich immediately.

There is no shortcut here. Like everything, investors have to learn every nuance of the market and have to be patient. You have to trust your knowledge and understanding.

While many stocks give good returns, the price of many stocks doesn’t increase for a long time, apart from this the price of many stocks also decreases significantly. Understand it this way, if one had invested in Hindustan Unilever Limited in 2010, the value of the investment would have been more than 10 times in 2020. In the same time period, the investment in yes bank would have remained one-fourth.

For investment, three things matter the most – time, patience, good stocks. Investment is for a long time, only then you can get good returns. Sometimes, in a short time, investment stocks get distracted by the price being too high or too low, and due to this ups and down, an investor wants to get rid of it. But if you work patiently on good stocks, you can get very good returns in the future.

There is a difference between Investment and Trading. To hold for the short term of any stock is trading and hold for the long term is an investment.

If we talk about the style of investing, it can be said that there are two styles of investing: –

1. Growth Investment: – Investment in such stocks, which shows considerable and steady growth every year. Stock prices continue to rise. In this, the price of the share is high; its value is more than it should be. But due to the long-term gains in these stocks, people like these stocks quite a lot, and want to buy at a higher price. Such investors are called aggressive investors.

2. Value investment: – The purchase of stock at the same price or less than the actual value of a stock is called value investment.

In this, we see the intrinsic value of a stock, that is, the actual price of any stock. All the big investors do value investment only. Such investors are called passive investors. It is for long-term investment.

If we talk about the most important parameter, while we have to choose any stocks, there are three parameters of investment; Value, Growth, and Risk. Let’s see all in detail: –

  1. Value

Two things are the most important to know the correct value.

a) P / E Ratio (Price to earnings ratio): – P/E ratio is the ratio for valuing a company. More P/E Ratio means either the company is overvalued or company is likely to grow a lot in the future. The P/E Ratio of any company should be compared with the other company of its industry.

P / E Ratio = Earnings per share / Market value per share

b) P / B Ratio (Price to Book Ratio): –

In this ratio, the market capitalization of the company is compared with the book value of the company. This ratio indicates which stock is undervalued. P/B Ratio less than one is considered good for investment. P/B ratio with ROE gives the signal about the health of any company. This should also be compared with their industry.

2) Growth

a) Sales growth: – Before investing, it is very important to see whether the company’s sales are increasing every year or every quarter. Investments in a company whose sales are increasing year to year or quarter to quarter give big returns.

b) Profit growth: – Along with sales, Profit should also increase year to year and quarter to quarter. This shows that the company is moving in right direction and growing steadily. Along with this, the operating margin also needs to be noted.

3) Risk

a) Debt risk: – Investment in a company that is debt-free is considered to be the best. But in some industries, they can not work without loans, such as NBFC. So here also comparison should be done in the company’s industry itself. Before investing in any company, one should look at the debt-equity ratio (compare with their industry).

b) Regulatory risk: – In some industries, growth is heavily dependent on government regulation, such as the pharmaceutical industry of India is heavily influenced by the FDA of the USA and EU.

c) Industry-related risk: – Many industries have different types of risk, i.e., the auto sector, whenever any new rule related to pollution comes; it affects the entire auto sector.

Apart from this, there are many more factors, which need to be taken care before investing. Keep patience and keep investing.

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