Investing can be a tedious process when it’s your first time. There are a lot of factors that you must consider for your first investment. Especially if you are investing your hard earned money and don’t want to lose it. If you end up investing in the wrong stock, then the chances of recovering your investment can take years. But if you focus and do proper research, it can be quite rewarding. There is no shortage of knowledge and learning platforms that can help you get started. In this blog, we’re going to talk about what factors to consider when buying or selling stock.
What Factors To Consider When Buying Or Selling Stock?
Before getting into the complex research that goes into investing, you must look internally for your personal investment goals. The markets provide ample opportunities to investors who pick the right stocks. The question you must ask yourself first is –
What is your time horizon for investing?
For example – Titan has given a return of over 213% in 5 years. There have been many companies that have multiplied investors’ returns in the past. But as an investor, are you willing to wait for 5 years for your returns?
Investments have primarily three types of Time Horizons –
- Short Term
Any investment that you intend to hold for a year or shorter is a short-term investment. This type of investment horizon is for short-term investors who want quick returns. Given that the markets are volatile and unpredictable, investing for gains within one year carries a high amount of risk.
- Medium Term
A medium-term horizon is an investment duration of one to ten years.
Most investors come into this category, as very few investors hold a stock beyond a decade. This form of investing carries a moderate risk level.
- Long Term
Long-term investors are individuals with excellent foresight and patience. They are individuals who invest and hold onto stocks for 10 years and more. Many ace investors have held stocks for the long term and their patience has been rewarded well.
2. Investment Goals & Strategies
Even though the end goal is to make gains in the market, individuals follow different strategies to pick the right stocks. This is why even within the investing community, there are different types of investors.
Here are three of the main investment strategies used by ace investors –
- Value Investing
Value investing is finding and investing in stocks that are undervalued when compared to their competitors. As its market value is lower than its fair value, investors expect the company to generate huge gains. This is the method used by most ace investors including the legendary Warren Buffett.
- Growth Investing
Growth investing is picking and investing in stocks that are expected to grow better. By growth, we mean outperforming the industry in terms of sales and net profits. Growth investors hope that these stocks will continue to grow in the future as well.
- Dividend Investing
As the title clearly states, investors, look for stocks that pay regular and significant dividends. This gives investors an additional incentive to buy and hold these stocks. Investors can reap their rewards or reinvest it into buying more stocks.
3. Selecting The Industry
When picking out stocks, industry selection is the first and most crucial step to investing. The reason is if you’re putting your hard-earned money into a company, at the very least you should be familiar with its business.
The simpler the business, the easier it is for you to understand.
Also, the sector should be future-ready, at least for your time horizon.
A growing industry shows the potential to grow rapidly in the future, and this makes a potential investment.
- Size Of The Industry
When analyzing an industry, the first factor to look at is its market size and the expected growth rate. As expected growth rates are not the same across different sources, one accurate source would be the annual report of that industry’s market leader.
- Entry Barriers
Every industry has certain barriers to entry, that make it difficult for new companies to enter the industry. The barrier varies across industries and it is not necessarily the same for all of them. For example – The banking sector. Any organization cannot open a bank without the license of the Reserve Bank Of India.
- Critical Success Factor
If you take a look at the most successful company within its sector, you’ll find one or more key advantages over all the other companies. This is what we call a critical success factor, which gives one company an edge over all the others.
4. Research The Company & Its Competitors
Once you have picked your industry, you can filter out the best-performing companies using key metrics. This includes market cap, sales, net profits, year-on-year growth, and so on. By doing so, you’ll be left with a handful of companies that are the top competitors in their sector.
5. Fundamental Analysis
Investors should always check the fundamentals of a company before buying a stock. It is through fundamental analysis that ace investors have picked their star-performing stocks. Some of the important ratios to consider when doing fundamental analysis are –
- Price To Earning Ratio
The P/E ratio compares the current market price (CMP) of the stock with the company’s earnings per share (EPS). This ratio is used to determine if a company’s stock is overvalued or undervalued compared to its earnings.
- Debt To Equity Ratio
The D/E ratio is one of the quickest and easiest ratios to understand a company’s debt position. A safe D/E ratio is anywhere between 0 to 1. Beyond 1 is a cause of concern as it indicates that the company is taking up too much debt. The higher the ratio, the worst the debt condition.
- Price To Book Ratio
The P/B ratio compares a company’s stock price to its net asset value, divided by the total number of outstanding shares.
- Stock Performance Compared To Its Peers
A lot of stock screeners such as Trade Brains Portal, Moneycontrol, and Trendlyne can show you the performance of your chosen stock with its peers. This tells you exactly how they have fared in the past, against competitors in the same industry.
- Revenue Growth
Irrespective of the type of investor you are, revenue growth has to be considered. Before buying a stock, you should look at the company’s financials and check for sales growth. If the trend is upwards i.e., the year-on-year sales are growing, then it is a good sign.
- Shareholding Pattern
Every investor should check the shareholding pattern of the company. It tells you exactly how much stake is held by promoters, among other investors. One key sign to observe is when promoters start buying or selling their stake in the company. As they are closely involved, they have a better understanding of the company’s operations and growth.
As a thumb rule, investing in stocks with high promoter holding is ideal. If the company is held by DIIs and FIIs too, then it is a bonus.
- Mutual Funds Holding
Retail investors are not the only individuals who are careful with picking companies. That being said, even AMCs actively look for good companies to invest in and add to their funds and schemes. When company stock is held by many mutual funds, it implies that is relatively safe and trusted.
- Dividend History
For dividend investors, this section is important. You can check the dividend history of the company using stock screeners or in the company’s investor section.
If your goal of investing is to generate income regularly, then you can primarily focus on this section of fundamental analysis. Ideally, look for stocks that pay regular and consistent dividends to shareholders.
These are just some of the factors to consider when buying or selling stocks. In-depth, there are more factors that determine investing decisions. For more information, JoinFingrad! The courses cover in-depth study of fundamental analysis, dividend investing and more. Thanks for reading our article “What Factors To Consider When Buying Or Selling Stock” and Happy Investing!
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