How to Assess the Quality of a Stock: Good, Bad, or Ugly | Motilal Oswal

How to Assess the Quality of a Stock

It is an almost universal opinion that investing in stocks is a good way to build your wealth. Even if investors do not ultimately invest in stocks, they do think about it. For long-term investment prospects, stocks represent a good way to invest. This is because, when a stock is held for a long period, it can go through the ups and downs of the market until its value finally spikes. According to Statista, in the FY 2021, the total number of companies listed on the NSE (National Stock Exchange) and the BSE (Bombay Stock Exchange) across the country amounted to over 7,462 in number. Therefore, don’t be surprised if you are confused about which stock to pick as an investment in the share market today. 

The Dilemma of Stock Investment

Stocks are considered as vital assets for those who wish to save up for retirement, or aim to achieve certain financial goals. It is possible for you to invest in stocks through instruments like mutual funds and exchange traded funds. Nevertheless, you may also consider investing in stocks of individual organisations. When you own a share of a company, you, in effect, own a portion of the company. When the company is successful, the stock or share prices rise and this provides gains for you. In the share market today, there are a plethora of companies whose stock you can purchase. 

However, the question that may confound you is which company stocks to invest in. How do you know if any stock is worth your investment? There are various parameters in stock selection which will make your process of stock purchase easier. Before you go ahead and open a Demat account, it is worth considering certain aspects of stocks to make your purchase-decisions easier. 

The Stock Price

The price is the first and obvious aspect to look at when you consider buying a stock. You can access the share market live today online. Coming back to the nuances of price of any stock, it is recommended that you view price in a context. Once companies achieve a degree of growth, they “split” shares.  Thus, the price is likely to decrease, but the amount of available shares will increase. There are also those companies whose shares never see a split. Therefore, a single share may be priced very high. 

The price of a share, when compared to the history of its prices, helps you decide how many shares you should buy within your budget. The historical data of a company will also give you some indication of whether prices tend to go higher or lower at certain times.  Therefore, you know whether you are about to buy a valuable share or not. 

The Growth of Revenue of a Company

Whether you invest in direct equity, an upcoming IPO, or any other equity-related instruments, you should be aware that the prices of shares are bound to rise if the company is achieving positive growth and success. One of the main ways that a company can grow is if its revenue grows. However, revenue cannot be viewed in a vacuum. Rather, as an investor, you may consider an increase or a decrease in a firm’s revenue, from one quarter to the next. If the trend of revenue-building is positive, your stock investment will likely have a good future outlook. Nonetheless, if it is declining or flat, you should find out the reasons before you buy shares. 

Historical Reports

Historical information about any given company tells you all about the establishment of the company and its path of growth. Especially if you wish to invest for long-term returns, you have to look at more than just present price performance, or a single earning report. Consider doing some research and view 10-year to 15-year returns of any reputed company. This will give you a clue to how and if a company can withstand any rough times. If you wish to invest in any upcoming IPO, historical data will help you determine whether the IPO is worth your investment. 

Per Share Earnings

It is well known that the “earnings per share” of a company drives the stock price of the company. If you take into account what a company has earned in one quarter, and divide this by the number of stocks it has sold, you get the EPS, or earnings per share. If this EPS is on the high side, it means the company is doing well. 

The Market Cap of the Company 

Bigger may not always be the best. However, if you wish to invest in stock that yields steady growth in the absence of high volatility, large companies can be considered. Any company's market capitalization is actually the value of all of its shares. Companies that have large market caps are big. Moreover, they are  diversified enough so that they are not affected by a tiny bit of bad sentiment/news. Behemoths like Coca-Cola, Procter & Gamble, or ExxonMobil are examples of these - robust companies that have provided investors with years of dependable returns. If you access the share market live, you will be able to tell, over a period, how large companies are influenced by market sentiment. 

Other Indicators 

However hard it tries, a company cannot control every little thing that may impact its business. While examining a stock to buy, the wider economy of a country counts for a lot. You need to ask yourself, what is the company’s role in the industry it is in, with respect to the economy of the nation. The share price of a company and its general health may be affected by rates of interest, unemployment, and consumer prices. Furthermore, is the industry that the company is a part of doing well? 

Ideal Stocks?

When you are exploring the stock to invest in or any upcoming IPO, you can only cover so much ground. If you have considered most things of importance pertaining to a stock, then you can be pretty sure of its efficacy to get you decent returns. However, your first step may be to open a Demat account at a good broker, and then take some great tips from analysts like those at Motilal Oswal. 

Related Articles: How to Open a Demat Account Without a Broker | Factors to Keep in Mind While Opening a Demat account | Factors to Consider When Opening a Demat Account | 10 Points to Remember When Operating your Demat Account | Types Of Demat Account & Trading Account

 

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