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A few useful tips to select a good company stock

It is essential to consider a few things while choosing stocks to invest in. But if you are new to the trade and are trying to build a portfolio for yourself, then do consider investing in diverse stock options rather than buying a single stock. The risk of incurring losses with just one stock can be made up by having multiple stocks. The reasons for losses or stocks may be sudden changes in the value of your investment. Here are a few dos and don’ts listed down to help you through your selection of stocks buying.

Don’t go by advertisements
If you are a beginner, then it is the safest option for you to invest in companies that you know or have heard of. This eliminates the risk of losses due to any fraudulent companies or any loss-incurring companies or start-ups. Alternately, companies that you have heard of will give you confidence that your money is invested in safe hands and you can assume to have a certain stability in the value of your stocks. Also, having a strong brand name that everyone can identify a company with is an indicator of a stable company whose financial condition is good.

Know who is heading the company
It is important to consider this factor as the top management or the members of the board of directors of the company that you are planning to invest in are familiar people. This indicates that they have certain qualifications or experience in running the company well and thereby, maintain a good reputation for the company. They will guide the company in times of crisis or cruise it towards higher profits. They are one of the main factors with which a company’s image can be associated with.

Evaluate the financial health of the company
It is mandatory for all public companies to release their quarterly and annual financial reports that are available either through their company’s website or filed online with the SEC. This can be a great tool for you to understand the company’s relationship with its investors. The company should have a history of consistency in its profit-making ability and financial health over the years.

Look out for the indicators discussed below:

  • Revenue should show growth: The value of the stock depends on the company’s revenue. The value increases with profit making and falls accordingly. Hence, if you are aiming to invest for a long run, the investment should be in a company that starts with growing revenue. But make sure it is not just the revenue, but also the profit margins that are high after subtracting the expense ratios in a growing expense margin scenario.
  • Check the company’s balance sheet: Get an idea of how much debt the company has. More debt indicates the volatility in the share price of a company because more income of the companies is required to go towards the payments of interests and debts. You can also compare the competitor companies to see if the borrowing trend is normal or unusual for its industry and size.
  • Company’s ability to pay a dividend: This is a good indicator to know whether the company is making profits or not. Also, if the dividend trend is increasing over time, it means that the company is keeping pace with the industry and making an improving profitable growth.
  • Research on the company’s business model: Make sufficient analysis to understand the various ways in which the company makes money. Know what are the products and services offered by the company. Understand the demand or possible growth of the industry the company serves in. This indicates what kind of business and possible growth the company will have in future and the ability of its stocks to perform to give you returns on your investments. Try to have a thorough understanding of how the company is generating revenue so that you will be able to evaluate the management’s decisions making ability. This will save you from a possible market crash in the worst case.
  • Determine the present value (PV): Understand the current growth rate and extrapolate a minimum possible growth over the next few years and understand the present value of the company. Using this, you can determine the possible cash flows coming in the future. With this, you can estimate an approximate value of the company. It may be a good idea to invest in the company’s stocks if your estimate is higher than the current market capitalization.
  • Check the company’s competitors and market share: Understand how the industry is doing in which the company is performing. Analyze the growth potential of the industry itself. If the future is good, then even a small company in your portfolio can make high profits. Then, identify how the company is dominating the market with its percentage share. This indicates its presence in the market operations. This is somewhat an indicator of security for your invested amount. For instance, investing in restaurants is riskier than investing in automobile or pharmaceuticals industries given the ease of breaking the barrier of top performers of the respective industry. It is necessary to consider factors such as skill level, capital required, distribution channels, government regulation, patents, and so on.
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