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How to Select Good Stocks for Long Term Trading Complete Guide Beginner

How to Select Good Stocks for Long Term Trading Complete Guide Beginner

Stocks are investments which people build out of their savings. Investors need to pick the right stocks to become a successful trader. Picking a stock should be done stepwise manner.

There are various methods adopted by different traders. People choose stocks according to their convenience. People need to understand where they are investing keeping in mind the basics of the business. The risk involved with the investment needs to be understood and kept in mind while building up the investment portfolio.

While selecting stocks of companies the performance of different sectors needs to be kept in mind and studied thoroughly. After determining the sector in which the trader would like to invest he would need to analyse the different companies in the sector with the help of fundamental and technical analysis to determine the overall performance of the company. The investor would need to check if the investment in a certain company falls in line with his overall agenda and goal of investment.

While making an investment the trader needs to realise that his basic capital needs to be protected and so he needs to take calculated amounts of risk which protects his capital and allows him to earn a premium over it. Any decision of buying or selling of stocks needs to be based on logic and analysis. Any emotional decisions of the investor can work adversely for him and capital to be invested.

Many people invest in stocks according to the dividends or pay-out received by the investors is a steady source of income. People can use the dividend for their own personal purposes or they can reinvest it in the stock and increase the size of their investment. There are other professional and big investors who like to invest in stocks with good financial backgrounds and strong performance records. They like to stay invested and allow their portfolio to grow with time.

Fundamental analysis of companies

There are many kinds of analysis which need to be accomplished before the investment is done. The intrinsic value of the stock can be estimated in the following manner.

Industry and company news

The performance of each sector varies from time to time. It depends on the overall demand and other factors which might be affecting the market. With the sudden energy crisis there is a sudden rise in demand for EV vehicles. There is a forecast by the top investing companies that this sector has a bright future. Similarly people need to analyse a sector and then analyse the company’s functionality in the sector and collect the news floating in the media about them. Usually good news gets more people to invest in them and bad news deter people in making worthwhile investment.

  

Change in management

Before investing in a stock, especially when an investor wants to make a huge investment, the study of the people who are the key decision makers or the people on the board need to be studied in detail. It has been observed that good boards who are driven with a set of principles usually take the company to the right direction which protects the seed money of the investors. It was observed in the case of Fortis Healthcare when the management was taken over by outsiders the stock prices shot up. Just Dial is another company which comes to my mind which was taken over by the Ambani group and the stock prices immediately shot up. Similarly when a company moves into the wrong hands the stocks of the company gets adversely affected. The growth path of the active board members is usually available on the internet and can be analysed professionally before investing.

Change in economic events

There are many economic events which make a lasting impact on the overall performance of business and the economy. For example when the interest rates of banks are released it has a certain impact on a person’s mind set. If bank interest rates are good then people would like to park their funds in bank FD’s rather than invest in stocks. Events like demonetisation of the economy and the new goods and services tax implemented by the government had the entire country in a state of frenzy. Companies and individual investors were all confused and could not analyse its implication. Under such circumstances it is a good idea to wait and allow the dust to settle down to get a good sight and see the way ahead. Investment should never be done with a muzzy head. It is a practical and calculated risk taken by an investor.

Financial Analysis of stocks

An investor will need to analyse the stock on the financials disclosed by the company. If an investor sees that the profits of the company are receding over the years and still the stocks prices remain the same, a doubt must flash in the mind of the investor and he must think if the stock prices are inflated. Under the circumstances the customer must become watchful and should not invest unless he is completely confident about the stock.

Reading the Balance Sheet and Profit and Loss Account

The Balance sheet and the profit and loss account of a company reflects the overall performance of the company in a year. If a company has been posting profit year after year, it means the stock is strong and the cash flow in the company is good. Investment in such companies is a good idea. The balance sheet shows the asset and the liabilities of the company. If the liability of the company is too high the earnings of the company will be diverted into repayment of loans and in case the payment is not made on time the rating of the company goes down and the risk of the creditor filing for bankruptcy becomes too high.  Therefore investors avoid investing in companies where the liabilities of the companies are too high.

 

Dividends

Many investors invest in companies who give good returns. Dividends are the profits shared by companies with their shareholders. Many companies share with their investors’ robust amount of dividend every year. This promotes the investors to reinvest their savings and increase their portfolio. This is another factor which can be kept in mind while choosing a stock for investment.

Technical Ratios

There are various ratios which are studied while selecting the stocks for various companies or diversifying the portfolio.

  1. P/E ratio is one of the main ratios which is used while doing the analysis. This helps in understanding the real valuation of the stock.
  2. Debt equity ratio is another popular ratio which is taken into account while making an assessment of the stocks. It gives a relative comparison between the performance of the company and other companies in the same sector.
  3. Current ratio shows the liability of the company shows the financial ability of the company to pay off the liability. If the ratio is not good an investor is discouraged to make investment in such stocks.

There are many ways of choosing stocks for one’s portfolio and these pointers are kept in mind even while making diversification in an existing portfolio of shares. These techniques need to be learnt in a step wise manner from an institute or a learned investor. Share market profile is the Best Institute in Chennai which has been educating investors the right form of investment and earning dividend on their savings. If you have been looking forward to learning investment in stocks log on to the website www.sharemarketprofile.com

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