Line of defence – This is also known as moat. You should always pick a stock that has a strong line of defence. In simple words, competitors should find it hard to overtake this company. Few examples are Maggie vs Yippee, Colgate vs Regular Toothpaste. The strength of line of defence can be found out by market cap and sales figures. Another example is Byju’s, this company has bought most of its competitors.
Dividend – The second thing to check before picking a stock is whether the dividend is increasing or decreasing over the years, also you should check whether the dividend justifies the stock price.
The third thing to note is whether the company is making consistent profits.
The fourth thing to check is whether the company has debt. Some industries depend on debt, for example construction of roads. However, the rest of the figures in the balance sheet should justify debt if you are picking such companies. If you don’t like risk then just choose zero debt companies.
The fifth thing to check is good return on equity. I don’t want to make this post lengthy so I’m not explaining ROE, if you don’t know what that is then search for it in the search engine of this website.
The sixth thing to check for is Promoter Holding. In one of my posts I mentioned if you want to get a stylish haircut then you should go to a salon where the owner does the haircut. The same applies to stocks, you should check how much of stake do the board members and promoters own in the company. There are cases where the people who run the company themselves don’t own the stocks of that particular company. Also if the company is new there’s something known as lock-in period, meaning the promoters cannot sell their stake during the lock-in period. Post lock-in period the promoters may sell a part of their stake, so do keep a check on these and price behaviour at such points.
The next thing to check for is legal issues. You can Google regarding the aforementioned by typing ‘court case’ after the company’s name.
Strange growth – this can be related to stock bubble (if you don’t know what that means then do check it out on this website). Bubble stocks are fun for trading and not good for investing.
Valuation – you can find all the valuation related terms like ROE, ROCE, P/E Ratio etc. on this website. Check them after this post. Valuation basically tells whether the stock is worth your money.
Technical Analysis – The three indicators I use are MACD, RSI and Bollinger Bands. You can check more about them on my post called ‘Day Trading for Beginners’. There’s also something known as reverse engineering, meaning you can look at the past charts and see the conditions of technical indicators and come to a conclusion whether technical indicators work or not. Note technical indicators should be considered along with fundamental analysis.
Volatility – There are stocks that tick most of the above boxes but yet the stock price remains stagnant. Stock volatility is denoted by Beta. So do check it out before jumping to buy a stock. You can know more about Beta in my post called ‘Day Trading for Beginners’.
Well that was it for this post. Do checkout other posts on this website 🙂
Disclaimer : Investing is subjected to market risks. Please read all the terms and conditions before investing. The motive of this post was to teach little things about stocks for those who do not understand much about stocks. Candidcanblog.com will not hold any responsibility for any losses incurred to the readers of this post.