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LORD JESUS CHRIST SAYS

“Ask and it will be given to you; seek and you will find; knock and the door will be opened to you. For everyone who asks receives; the one who seeks finds; and to the one who knocks, the door will be opened. Matthew 7:7-8

27 May 2019

STOCK MARKET--8 steps to select a stock to invest in Indian stock market:


Does the company have good fundamentals?
To find the answer to this question, there is a 2-minute drill to find a fundamentally strong company. Using this drill, you can filter the healthy companies so that you can proceed to investigate further. If the company is not fundamentally strong, there is no need to learn more about its products/services, competitors, future prospects etc.
You can move to the next steps only once you confirm that the company has given good past performance and is worth investing in. For this 2-minute drill, you need to look into the financials of the company. Here are 8 financial ratios and their trend that should be carefully noted in this step:
  1.  
    1. Earnings Per Share (EPS) – Increasing for last 5 years
    2. Price to Earnings Ratio (P/E) – Low compared to companies in the same industry
    3. Price to Book Ratio (P/B) – Low compared companies in the same industry
    4. Debt to Equity Ratio – Should be less than 1 (Preferably debt<0.5 or Zero-Debt)
    5. Return on Equity (ROE) – Should be greater than 20%
    6. Price to Sales Ratio (P/S) – Smaller value is preferred
    7. Current Ratio – Should be greater than 1
    8. Dividend – Increasing for the last 5 years
If you are not familiar with these financial ratios, you can read more here: 8 Financial Ratio Analysis that Every Stock Investor Should Know
Once you are confident that the company fulfills most of the criteria mentioned above, then study the financial reports of the company. Reading financial reports (Profit & loss statement, balance sheet, and cash flow statement) can take a little time. That’s why first make sure that the company passes the 2 min drill before you start investigating further. I have written a detailed post on how to read financial statements of a company, which you may find useful.


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