A seasoned investor has to invest time and effort into evaluating the real value of a stock. Making a wise and informed choice has a lot to do with a holistic research and trend analysis of the particular company that is being considered as a possible investment. These 7 principles of stock selection help you in making wise choices in the stock trading world.
When investing in stocks, it is essential to consider certain parameters before taking the plunge. Making a wise and informed choice has a lot to do with a holistic research and trend analysis of the particular company that is being considered as a possible investment. Let’s call these parameters the 7 principles of stock picking. And these are-
1) Price and Performance : This parameter helps analyzing the current technical levels of the company by looking at the current and past price movement and the stock’s performance in weekly and monthly charts.
It includes the major high and low points the stock made in the past, such as:
- 52 Week high/Low or life time high/low
- Average daily volumes for the last 20 days.
- Average daily movement (ADM).
- The percentage of shares pledged by the promoters.
2) Product/Service : This criteria includes the study of the company’s profile and it’s main line of business. It helps the investor to understand the business model of the company and the products and services it has to offer. It gives an idea of the company‘s business activity to the investor. And it is always good to know what you are working with. You shouldn’t invest in a company whose work you don’t understand.
3) Profitability : This factor studies the performance of the company over the years and quarter on quarter (QoQ) by looking at its sales, net profit, earnings, and any other exceptional items thus allowing the investor to understand the past and current performance of the company and reasons behind increase/decrease in its revenues.
4) People : This part of the strategy allows the investors to study:
- the current management
- share holding pattern of the company
- Percentage of FII /DII investments in the stock over Year on Year(YoY) and Quarter on Quarter(QoQ).
The increase and decrease in FII’s or DII’s is a very important factor as it gives a clear indication of the demand of the stock in the market. Studying investors holdings of more than 1 % stake in the company (apart from promoter holdings) gives an idea if any High Net worth Individual (HNI) or some big fund house has a stake in the stock. This adds credibility on the returns of the stock.
5) Peers : The word Peers is self explanatory as a competitive analysis of other companies within the sector adds more clarity to the picture. Studying the market capitalization, sales, profit margins, earnings, market share and the returns of its peers has gives a snapshot of the various players in the market and helps the investor understand the sector he/she is investing in.
6) Philanthropy : Most of the leaders of successful organizations give weight to the ideology that to attain long term success, it is necessary to have some genuine social responsibility. Studying a company’s philanthropic activities can also give an insight into the overall financial health of the organization.
7) Prospects : This is the last and most important part of the strategy as it indicates the future potential of the company. Studying the future aspects of the company and its sustainability in the market is crucial to stock selection. These include directors / management reports, annual reports, future orders, current overall performance, any current or future news updates, bulk &block deals, strengths and growth of the firm.
Therefore, with the help of this strategy one can understand the company’s past, current and future workings in a snapshot and allow the investors to take better and informed decisions.
6 Replies to “The 7 Golden Principles of Stock Selection”
Thanks Chetan Panchamia and Rajandran for the link.
One of the terms we used to see is ‘the percentage of shares pledged by the promoters’ and this surely adds more weightage in picking the stocks.
Yes a Valid Point when comes to investing!
Where can I get data of Average daily movement (ADM). ??
You can try with the indicator Ultimate Volatility Expert which uses ADM in its strategy
good information. nice article.
Thanks for sharing the post. The way you narrated the post is good and understanding. After reading this post I learned some new things. This is the best post for stock selection. Please let me know for the upcoming posts.