Investing in stocks is considered to be an achievement of sorts in our country. I still get questions from my friends and family on how to choose a stock for investment, safety of stock market, etc. Despite of answering all the questions, I see that only a miniscule number of people actually invest in stocks. The fear of stock market could be scaring them away. However, I don’t think stock market is such a scary place. In fact, it is better than real estate sector in India which is fragmented and illiquid. Stocks vs Real Estate is a different subject altogether, though.
If you are serious about creating wealth in stock market, here are five smart tips which can work for you:
1) Understand the Business of the Company
Choosing a stock is not as easy as opening a free demat account. The first step in choosing a stock for investment is to understand the business of the company. If you are a novice, you are not expected to study the fundamentals and financials of the company. However, read well about the company’s business model and try to understand its mission and vision. Know if it is making profits or into losses. Check if it has plans to diversify the business to other states/countries. These will give you a fair idea of the future potential of the stock.
(Also see: How to choose the right stock broker?)
2) Look at the past returns of the stock
Once you know about the company, the second step would be to check the performance of the stock ever since inception. Consistency matters a lot. If it has been established a decade ago, it would have seen several market tides. If the stock has been able to withstand tough times, it will definitely be a good buy.
3) Check who else is Interested
It’s important to know who else is invested in the stock. Demand drives the prices everywhere including stock market. If there is no one willing to buy the stock, there is no point in wasting time on it. Check which AMCs/Mutual Funds have invested in this stock. Fund managers do a thorough research before investing in a stock. If more funds are investing in this stock, it increases the prospects of it performing in the future.
(Also see: Growth stocks can offer good returns in slowdown)
4) Compare with Peers
Check the performance of the stock compared to its peers and benchmark indices. It should not underperform the peers more often. If it does, it is a negative sign for the stock. There is no point in running after losers.
5) Refer to Expert Advice
Since you are investing in stocks for the first time, do refer to expert advice. You can check popular newspapers and online portals for smart tips. There are healthy discussions on several online forums on this topic which you can refer to. However, make sure you read multiple reviews before coming to a conclusion. It’s advisable not to follow intraday trading messages. Since you are a new investor, you should be looking to invest in stocks which can grow over a period of time and make wealth for you.