The ongoing pandemic situation and the availability of unlimited information online have ignited the interest of a common man in the field of the stock market. But it is essential to note that picking the stocks blindly can wipe out hard-earned money in a matter of seconds.
A wise investor understands that even though the stock market is a good way of minting money, one needs to look at certain key factors to minimize losses and reap the benefits of the stock market.
Following are the 5 tips you should know about every stock you buy in the stock market:
- Carry out thorough research of the company – what, why, where, how, etc.
- Analyze the P/E ratio of the company.
- Analyze the beta of a company to understand the risk involved with the stock as compared to the market.
- Invest your money in stocks offering high dividends to ensure a steady flow of income.
- Read the stock charts to understand the stock performance.
Let us understand each tip in detail:
- Research the Company – As an investor, you must do thorough research of the company and its objectives. Find out what the company manufactures? What kind of services is offered by it? Does it have branches across the world? Find out details about its flagship product and its performance over time. Is it a dominant leader in its field? If not, then why? Try to read the pulse of the company as the money will be used by the company to fulfill its objectives.
Read about the company on the internet. Discuss the company and its plans with a friend or a relative to gauge your understanding of it. Once you are confident, you can proceed to the next step.
- Analyze the P/E Ratio – The Price to Earnings (P/E) Ratio is a ratio for valuing a company that measures its current share price relative to its EPS (Earning per Share). It is also called the earnings multiple or the price multiple.
P/E Ratio = (Current Market Price of a Share/Earnings per Share)
P/E ratios are used by analysts or investors to determine the relative value of the shares of a company. You can also use it to compare the company with its own historical record or for comparison of aggregate markets against each other over time.
If a company has a P/E ratio of 25 it means that the investors are willing to pay Rs 25 for every 1 Rupee earnings. This is acceptable if the company is growing at a faster rate.
Therefore, if a company shows a high P/E Ratio, it means that it is on a trajectory to growth or is overvalued. It also means that the company is expected to have high revenue in the future and this speculation has led to an increase in the stock price.
Whereas, a low P/E Ratio means that the stock is undervalued because of the risk in the market. It could also mean that the company shall perform badly in the future due to which the current stock price is falling. Find out the reason for the higher or lower PE of the company that you are willing to pick as a stock.
- Analyze Beta – Beta measures the volatility of the company and how the stock has acted over the last 5 years. It estimates the risk involved with stock as compared to the entire market. Beta value can be found on the same page as the P/E ratio.
S&P 500 Index has a beta of 1.0 and the individual stocks are ranked according to how much they deviate from the market. If the stock of a company moves more than the market over time, it has a beta of more than 1.0 and if the stock swings less than the market, it has a beta of less than 1.0. The stocks with high beta are known to be riskier but have higher return potential. On the other hand, low beta stocks have low risk but have lower returns.
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As an intelligent investor, you should watch high beta stocks closely because even if they have the potential to give you profits, they may also wipe out your money. A lower beta means the stock does not react much to the S&P 500 movement. This type of stock is called defensive stock as your money is much safer. You won’t make a huge amount of money in a short time, but you don’t have to track this type of stock every day.
- Look For Dividend – If you have a busy lifestyle but you want your stocks to make money without much observation, look for stocks offering dividends. Dividends are similar to the interests in a savings account, and you get your share regardless of the stock price.
Companies offer dividends to their shareholders as a reward for their profits. The board of directors decides the dividend amount and it is generally issued in cash. Some companies offer dividends in the form of stock shares.
Dividends are important to many investors as they offer a steady stream of income for them. They are issued at regular intervals and offer security at times of uncertainty. Some of the sectors with the dividend-paying companies are healthcare, oil & gas, banks, and financials, utilities, pharmaceuticals, etc. The start-ups may not have the profitability to issue dividends in the early days.
Before you decide to buy some shares, find out the dividend rate offered by the company. If you wish to park your money in the share market, you can invest in stocks paying a high dividend.
- Read the Charts Carefully – The stock charts play a crucial role in technical and fundamental analysis. There are different types of charts like bars, lines, candlesticks, etc. As an investor, you must be able to analyze the charts and make an informed decision.
But reading the charts accurately isn’t everyone’s cup of tea. It is a skill that is required, especially for beginners. As a basic rule, if the stock chart starts at the lower left and ends at the upper right, it’s a positive sign. On the other hand, if the chart is headed in a downward direction, it’s better to stay away.
As an investor, you will have plenty of stocks to choose from. But if you are good at reading the stock charts, you will be able to identify the parameters that define a quality stock.
These are the 5 tips you should know about every stock you buy in the market. Given the unlimited number of stocks in the share market, it can be overwhelming to pick the best stocks for your portfolio. One good way to protect your money is to invest for the long term by picking stocks that have a good track record and offer timely dividends. If you have time and energy to invest, intraday trading is also a good option.