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The Thumb rules to help you Pick the Right Stocks

 You may want to invest in stocks to get returns that are higher than those that may be obtained through, say, fixed deposits. But if you are new to the stock market, the sheer magnitude of options that you can pick from can confuse you. Therefore, to help you, we present these thumb rules that you can follow to pick stocks.

 

Invest in more than one stock
It is always important to invest in more than one share to cover the losses if one stock does indeed drop in price. This way, you, the investor, are insulated from most minor market shocks.

 

Study the company’s business model
If you want to invest in a particular company, ensure that you study its business model carefully. That is, you need to understand how the company works and makes money. This is crucial because this knowledge will help you know if the model is sustainable in the long run or not. The business model research will also tell you if the company is different from its competitors and if so, how exactly it is different. You should invest in the company only if the business model is sustainable because that will just ensure that the company continues its operations for a long time. Else, the company will enter into losses.

 

See if the company has a unique selling point
If you want to invest in a particular company, ensure that it has a single selling point. For instance, many companies sell smartphones in the present day. But the Apple company’s iPhone stands out. Why is this? It is because of its perceived value among other factors. Look for such factors in the company that you want to invest in. If you find a unique selling point, then see if that uniqueness can be sustained. If so, then try to invest in such a company.

 

Invest only in companies that are leaders in their industry
Some companies are considered the pioneers or leaders in their industry for a reason. Invest in such companies to make sure you do not face any shock losses. The market leaders will have a clear vision and a method to get there. They will also ensure that the interests of their shareholders are protected. Sudden shocks concerning price can be avoided.

 

Study the company’s performance reports
To know if a particular company is profitable or not, you need to study the company’s performance reports. This research will give you a clue about whether the company is profitable, or not. Even if the company is not beneficial for a particular quarter, if it has a sustainable business model and is unique in its industry or segment, then it is possible that the company could return profits very soon. If there are dips in performance, analyse why the declines did happen, whether it was specific to the company or it was industry-wide or if the market as a whole had dipped. All of these are important indicators of the company’s longevity.

 

 

Study the company’s leadership team
Before investing in a company, study the leadership team of the company. That is, see if there are any notable heads of business that are part of the management team or board of directors. If there are such people, there is a good chance that the company is in good hands. That means the company will be steered in a specific direction to return a profit and thus your investment will be safe. Even if you do not find someone who is familiar or notable, sometimes you can take a bet on a new company but only if there is prior proof of performance. This could be difficult, but it will save your investment.

 

Check the debt-to-equity ratio
To know how the company is performing, check the company’s debt-to-equity ratio. This indicates how much debt a company is carrying concerning the number of shareholders of the company. It would be best if the value of the ratio is less compared to the industry that the company operates in. If the ratio is high, your investment is subject to a higher level of risk.

 

Check if the company you invest in pays out dividends
To ensure that you have a source of income while you continue to hold onto your stocks, see to it that you invest in a company that pays out dividends regularly. This way, you can let your shares appreciate in value for a bigger payoff later.

 

Check the valuation of the company
To know if a company’s stock is worth a certain amount, it would be best to use a valuation process that will indicate the company’s worth compared to others in the industry. There are different ways to evaluate a company.

 

See if the company has free cash flows
Free cash flow is the cash that the company has left with itself after spending money on its asset base. The more free cash flow the company has, the better it is for investors.

 

Do not panic
If you notice that the stock you are holding has dropped a bit in price, do not panic. Do not sell your holdings immediately. For all you know, the dip could be temporary, and the stock may hit a higher value later on. Make sure that you have considered all possibilities before selling your holdings in a particular company’s stock.

 

 

Conclusions:

These are some of the thumb rules that you can follow to invest in stocks. These will act as a guiding post for you in case you are lost and do not know which stocks to pick. In addition to this, avoid falling prey to biases that might influence your investment behaviour. You can find more information about specific stocks on BankBazaar.

 

 

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