Many people often seek stock trading is the premium way to generate huge income in minimum time. This is because investment in the stock market helps them to meet their future financial objectives. The rise in inflation, volatility, and unpredictability in the stock market make individuals rethink before picking any stock in the stock market.
The stock market, however, constitutes an important part of everyone’s life as it is one of the oldest and most popular investments because of numerous benefits in investing in stocks. To meet the price increases due to inflation, investment becomes important.
Selecting the right stocks is an important factor when it comes to receiving potential returns from the stock market. For that, you need to explore several financial magazines, and financial blogs, and get subscribed to stock tips from several stock brokers.
This is not a one-day thing, the selection of the right stock requires investors to do fundamental and technical analysis. If you are a smart investor, who wants to gain consistent returns from the stock market, you have come to the right place.
Before deep-diving into the stocks, let’s understand what exactly a potential stock:
Stocks which are desired to provide unmatched results against investment are termed as potential stock. Such stocks are often categorized into undervalued stocks.
In this blog, we will uncover the essential steps you need to consider while selecting the right stock.
1. Diversification of your portfolio in several potential stocks:
The famous quote saying “Not put all your money in one basket which simply says diversification of money in different stocks. Diversification of stocks is extremely necessary as if one stock is not performing well that doesn't mean that other is also not working well.
2. Higher Liquidity:
The Bombay stock exchange and National stock exchange plays a crucial role in the Indian stock market. This is because many companies list their shares on either or both the exchanges. This provides high liquidity to investors because average daily volumes are very high. Therefore, if an investor wants to purchase or sell any financial security on the stock exchange, this liquidity makes it easy.
3. Does the Company have good fundamentals?
Investing in a company that has good fundamentals is extremely important as financially wealthy companies provide you with outstanding returns than other companies. Suppose, if a company does not sound financial well, then it would be ideal to check the products or services offered by the company. This will give you a clear idea of the company’s financial potential strength.
You can move ahead with the company once you recognize that the company’s past performance is good enough that will provide you with positive returns. Hence, it is advisable to invest in such stocks which are fundamentally strong.
4. Versatility:
Needless to say, the Indian stock market offers numerous stock market instruments, such as bonds, mutual funds, shares, and derivatives. This provides investors or traders with a variety of choices to invest in numerous financial instruments. Helping various investment choices investors have flexibility in minimizing the risks by enabling diversification of an investment portfolio.
5. Avoid Investments That are Emotionally Driven
When the stock market turns down during the pandemic, many investors thought that the stocks would never achieve high value and therefore they sold their stocks to reduce their losses.
After doing so, investors thought that they took an informed decision but in reality, it was more of an emotional decision. After four months, the stock market has started to recover its own. Had the investors not sold their stocks during the pandemic, their losses would have been recovered to a greater extent.
6. Higher Returns in the shorter period:
As compared to other financial securities such as fixed deposits, and bonds, stocks investing provide investors with a better opportunity of achieving huge returns in a shorter period. Considering the stock market basics such as using stop-loss, doing research, planning the trade, due diligence and being patient can reduce the risk regarding stock investing and maximize the returns on stock market investment.
Here, We will talk about 4 financial factors which help to determine whether the company is financially stable or not:
1. Price to Earnings Ratio:
Price to earnings ratio should be low as compared to other companies.
2. Earnings Per Share:
Look at the EPS of a company for the last 5 years. If EPS consistently increases, then you may consider that the company is growing.
3. Price to Book Value:
Price to book value should be low as compared to other companies within the same industry.
4. Return on Equity:
A company can be considered as financially strong if ROE should be greater than 20%.
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