The stock market has always played a key role in the economic growth
of developed and developing countries, holding pace with the world economy and
sustaining stability.
So, If you are someone who is thinking of investing in the stock
market, then you are on the right path. But do you know various studies have
found that more than 85-90 percent of investors don't know the right investment
strategies, that is how to access the stock market and stock information and
how to choose the stock and use it to protect and grow their investments?
That is why here we will discuss the top 7 investment strategies to
choose the stock so that you can grow your money through the right track.
Firstly, it's crucial to understand that the stocks with which you
are going to trade depend on various objects, like, your level of
understanding, capital availability and what type of trading you are planning
to do like, swing trading, position trading or long term investment. Now
depending upon all these you must have a dynamic but written trading plan or
investment strategy by your side for successful investment.
Primarily, we must know that, for stock investment,
always the best option is to focus on fundamental analysis instead of technical
analysis. Few tools, associated with the fundamental analysis, are given below.
TOP 7 INVESTMENT STRATEGIES TO CHOOSE A STOCK
1.Try to choose stock with Low P/E Ratio.
This is one of the most prominent mechanisms to look for overestimated and undervalued stocks. A low P/E ratio is
normally better than a high P/E ratio because a company with a lot of cash on
its balance sheet is exemplary to one loaded with debt.
The full form of the P/E ratio is the
price to earnings ratio, that is the ratio of the existing value of a company’s
stocks to the company’s dividend per share. An elevated P/E ratio could pull
back anytime promptly. But when it's about a lower P/E ratio, it reflects an
undervalued stock that can be an impressive value as the demands have lifted
the shares below their real price.
Practically, the P/E ratio of a
company is correlated with the P/E ratio of the prevalent sector or market for
concluding whether the stock has an impressive valuation or not. On average, if
you chose the stock of a company with a price
to earnings ratio ranging from 13 to 15, then it's a good choice.
P/E ratio =market value per share/earning per share.
So, use the price-earning-ratio tools wisely
while picking a stock.
2.Constant
dividend policy.
In a
constant dividend policy, a company has to pay a portion of its income as
dividends every year.
One can predict the earnings of a company by
judging it based on the congruence of the company for reimbursing and lifting
the dividend.
Suppose a company is paying regular dividends
that means it is financially stable enough. Though there are varied impressions
about how many years you should evaluate to look for consistency, this range
gives you a notion about the financial strength of the company.
3.Growth in
Profit Consistently.
One of the best stock investment strategies is
to check the growth in profit of a company. If you are new in the stock market
try to pick a company whose profit is increasing day by day, because if profit
is not increasing or stagnant then it will not provide the shareholders with a
marginal amount of profit.
It's highly recommended to avoid the stocks of
a company whose profit is sometimes growing and sometimes not or whose profit
is stagnant.
For measuring the growth of a company following the financial ratio called,
Returns on Assets is the best choice.
▪Returns on Assets(ROA):
The
percentage of profit a company receives about its prevalent resources is
generally called ROA. Returns on Assets is the best financial indicator to
evaluate the previous performance of a company.
ROA=EBIT/Average total
assets.
(Here, EBIT=earning
before interest and tax)
If the ROA of a company is below 5%,
then it's better to stay away from its share and if its ROA is more than 20%,
then it's an asset-light business and you should pick their stock.
4.Value Trap.
Purchasing a cheap or underrated stock is not
always a good choice, because it could be a value trap and sometimes it can
lead the way a lot downward.
Generally, Value traps are examined through the
debt ratio and current ratio of the companies.
▪Debt
ratio:
The total percentage of possession of a company
that is purchased on finance or deficit is called debt ratio. To evaluate this,
the total detriments of the company need to be divided by its total assets.
Debt ratio=Total
liabilities/Total asset of the company.
In
general, the debt to equity ratio of a company varies from industry to
industry, but mostly, a favourable debt
to equity ratio is around 1 to 1.5. Though for some industries it could
be greater than 2 also.
Current
ratio:
A company with a higher current ratio
represents a company with higher liquidity and it also depends upon in which
industry the company belongs. As an investor, you should choose a company with a current ratio 2:1 or more.
Current ratio=current assets/current liabilities
As an investor, one needs to remember that when
the debt is high, the chances of the
company being a value trap is more.
Indeed fundamental analysis is the first and foremost
step when we are talking about investment strategies for choosing the stock,
but despite that, there are also various investment strategies that one needs
to follow.
5.Risk Management.
While choosing any stock, it's important to
keep risk management in mind, like what extent of risk you can pay for. That is
why you need to create your stock choosing strategy that is developed to
conserve the capital and restraint risk. And, here, the most valuable motive
should be to preserve your capital.
There is a whole range of stocks to trade with
and each of them has several degrees of vacillation, rate, and volume aspects.
In the beginning, one needs to Initiate by minimizing risk. As that person's
skills and experience will grow as an investor they can analyze developing risk
related to the stocks he/she chooses to trade.
6.Make your
strategy based on your personality.
Different people have different kinds of
attitudes and as an investor, you must follow your personality while choosing
any stock. Suppose you are a 25 years old who loves to live a fast life. Then,
Scalping is the best option for you as it's a little difficult for you to focus
on a particular stuff for a long time. Again, if you are 60 years old who love
to think thoroughly before making any decision then swing trading low
volatility stocks are the best choice for you.
However, whatever your type is, one must keep
in mind that different stocks have different degrees of volatility and momentum
of price motion. You should be
proficient to recognize which is the hare and which is the tortoise through
utilizing tools such as Beta, Level I and Level II information.
7.Evaluate the
economic condition and imagine the big scenario.
When you are choosing any stock, especially
long term stocks, using economic indicators can be the right choice. In simple
words, you need to analyse the economic condition to predict the momentum of
the market.
Mostly, the stock market charts consider the
forward-looking economic indicators. A similar notion is applied if the indices
indicate a consistent rise, but the economic volumes are showing that the
economy is however vulnerable.
Also by reading and analysing daily headlines
that are the economic indicators one can evaluate the big picture in the case
of long term investment.
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