Whenever you talk about Stock Market with the people around you, the most common reaction that you would find in emerging markets is that it is a place to lose money. There are lots of stories in the market where people go bankrupt or lost all their money in the share market, which is true. People take high leverage or loan to make a fortune in the share market overnight. This habit actually complements the idea of losing money in the stock market more.
But the reality is different. People need to understand, the stock market isn’t a place to gamble upon. This is an encyclopedia of different fundamentals and various instruments that a retail investor needs to understand before putting their money inside the basket. Here, let us decode the seven basic things you must observe in a Stock before you finally make a decision to invest your hard-earned money in.
- Always look for a company that has a good cash flow. Remember this is the main factor that gives your stock an edge over its peers. The higher the cash flow, the more is the strength of the company to go through tough economical conditions.
- Don’t judge a company over its high P/E ratio, sometimes choosing a stock only because of its low P/E ratio can be the wrong decision. We have already written an article on why retail investors lose money on simply investing based on PE ratio which covers the detailed aspect of it.
- Look for companies that have higher ROE (Return On Equity). Personally we choose companies that score more than 20 % in this parameter.
- Higher the EPS( Earning Per Share) more profitable the company is. Before you make a choice to actually invest in any business for the longer term, remember that you have to look at this parameter very minutely. Never invest in any business where you find that it is generating a -ve EPS. Always look for a company that has higher EPS in its segment and it is growing it periodically.
- Do not try to time the market if you are thinking for a long term wealth creation. It may happen that during a very bad phase of a countries economy, certain businesses have more growth opportunities due to the particular crisis.
- Look for businesses that are here to stay and has low debt. Never ever invest in any company where you do not understand the business.
- Learn to read and understand the companies annual business report and the quarterly business report. Never ever compromise it for any reason. Remember those documents are the guide book for the retail investors. It will give you the actual reason to exit the business you are invested in.
Disclaimer: Investing in the equity market is subject to high volatility so you are always suggested to do your own research and take proper guidance from your financial advisor before investing.