32 Key Factors to know before buying Stocks?
What to see while buying Stocks? is EPS, P/E, Book Value, Debt of Company, Annual Returns, Growth of Company, Management of Company, Similar Stocks Performance within Country and Globally, Operating Profit, Net Profit, Key Financial Ratios of the Company and many more. Let us see one by one in details.
1. What Business is doing by Company? What Products or Services delivered by Company to generate Money?
In simple if company business can generate good profits now and in future and if there is potentiality of good future growth, then they are right candidates to pick if they are trading at decent prices to pick.
First understand how the company is generating money. What type of products they are building? What type of Services they are offering? How long is it into business? How is past performance and results of company? How will be the companies business in future. Let us take Technology companies like Apple, Intel, Microsoft, Cisco, Taiwan Semi-Conductors, Infosys, TCS, Samsung. During market falling down along with other stocks these stocks will also fall and after reaching some point again there will be bounce back in these stocks and they will come to normal market values. Reason is companies revenues and Net Profits will always be there even small issues comes in between. So these companies can be bought when they are trading at decent levels and again not at very high prices. Don't go and jump to buy Stocks when trading at higher prices and burn your hands. At that time better to do fixed deposits or buying some land which will give decent returns is better. Especially in India, investing in Agriculture lands will give decent returns rather than investing in stocks trading at high prices.
People who invested 10 to 20 years back in Bikes, Cars and other Vehicle manufacturing companies made good amount of money. Their business model is as economy grows and as people headcount grows, more sales will be there and more business will be there. Now if you take current time those companies who are manufacturing Electric Vehicles will be future winner as people are concern about Oil Prices and Pollution levels.So such companies will have bright future or they will be acquired by other big companies is these innovative companies builds good Patents. .
FMCG Products like Nestle, Hindustan Unilever stocks will fell when markets are at bad time and again rises when markets are good. Because these products consumption is continuous and will be growing. Even while trading in these types of stocks, we need to see whether any new companies upcoming in the same sector. Profits will dilute. Take Patanjali entrance into FMCG Sector in India. Consumers will not increase as companies increases. So obviously what Patanjali grabbed is share of Nestle, Unilever and other FMCG Companies in India.
Note: Companies that do innovative products and can not be manufactured or developed by other people in one or two years will have bright future considering if that innovative products solves the critical problems of people.
Innovative Products and Services: Take the case of Semi-Conductor Products, Bio Technology sectors, Pharmaceutical Products.
Season Products: Some products will do particularly good in some seasons. Fertilizer stocks are best examples for Seasons Stocks. These Stocks will up during rainy season and again stocks starts to fall after rainy season. Those Type of stocks should be picked up after rainy season when the price has fallen down as stock price will be up in rainy season and not during peak price in rainy seasons. Again see stocks you are picking whether has good past performance and future will be good?
Take the case of Hotel Stocks. More demand for Hotels in Summer season and less demand in Winter season. So obviously stocks prices will fall during winter season. This is when you have to pick the quality stocks in this sector.
Luxury Goods: Luxury goods stocks will be good when economies and spending capacities of people will be good. Buy when you predict economy is getting more strong going ahead. Sell it of when you smell that economy is going weak.
2. How Much is Earnings Per Share (EPS) of Company?
Earning Per Share is what we get by dividing Company Profit with Total Number of Shares in a company. Let us say Company A net income is 100 USD per year and that company has 50 shares. So each share got 2 Dollar net profit. So here 2 Dollar per Share is EPS. Along with Earning Per Share (EPS), we need to see Forward EPS and P/E Ratio (Price to Earning Per Ratio). Forward EPS is future EPS of a company.
3. What is P/E Ratio? How much is P/E Ratio of a Company?
In the above example Net Income is 100 USD and EPS is 2 USD. P/E ratio is dividing current price of share with EPS of a company. Let us say this company share price is trading at 30 USD in stock market then P/E ratio is 15 (i.e 30/2=15). If the same company share price is 40 USD, then P/E ratio is 20 (i.e 40/2). So considering all factors of two company stocks remain same related to 2 companies, you have to prefer the share which is trading at low P/E.
Generally it is better to buy stocks if P/E ratio is less than 15 and if at all year by year EPS Growth is good then may be shares worth EPS 20.
Again many factors to take into consideration. Sometimes it is worth to buy Shares trading at P/E ratio of 30 as well. Let us take examples of Amazon or Paypal when they are at start up companies. Both companies will be having long and bright future depending upon their business model. So when they are starting stage, it is worth to buy them at P/E Ratio of 30.
Now consider another company which is trading at P/E of 10 only. But the Management of company is bad. Stay 100 Km away from buying that company stocks and do not buy those stocks even if it is trading at P/E ratio 5 or 7. If Management is doubtful and if they are doing any fraud things then do not invest in that company.
4. How much is Book Value of Company Share?
This is very important factor. In simple language if a company assets are sold and after that debts are paid then if the left out money is divided by number of shares, we will get book value of share. So if Book Value of share is closer to Stock Price, it is good. Let us say if the share A and B, if all factors are same except (Share Price / Book Value), then you have to buy whichever is having lower (Share Price / Book Value) ratio. Higher Book Value i.e closer to Stock Price is advantageous.
5. How much is Revenues / Debt Ratio and How much is Net Profit / Debt Ratio?
Debt should be always compared with Companies current Profits and Future Profits. If the company can not generate good profits to clear the debts then whats the point in investing such type of stocks.
Actually Banks also should consider Profits of Companies and Stock Values of Companies (Atleast 2 years of Stock Trading Average) and not just current stock value of company.
6. What is 1 Month Moving Average, 3 Months Moving Average, 6 Months Average, 12 Months Average Trading Price of Share?
This Strategy makes sense for short term and these patterns tells psychology of people trading in that stock. Let us say after stock price fall and again after bouncing back if stock is trading above 3 months average for 2 or 3 days without going below the 3 months average price then those stocks can be picked up for short term. Again we have to see local stock markets and global markets are not going in negative trend while doing so.
Again these rules are not Science Formulas that will always work. This strategy is purely based upon Psychology of people in market.
Vice versa also. General trend is if stocks below 2 or 3 days below 3 months average, then generally couple of people try to exit from that stock. While doing so stock prices will fall bit more and cause more pain in Stock.
Again these rules are not Science Formulas that will always work. This strategy is purely based upon Psychology of people in market.
7. What is P/E Ratios of similar Stocks within same Country and in different countries of Similar Sector Stocks?
Relatively low P/E Stock should be picked if all factors between Share A and Share B is same.
8. How is Key Financial Ratios of Company?
Debt / Equity Ratio : This should be low. Banks will consider this factor while giving additional loans. When interest raises, companies with higher Debt / Equity ratio will fall as there will be more interest burden on company.
Short Term Debt / Equity Ratio : If it is higher ratio and company is not in position to pay debts then share prices will fall as sometimes it has to sell companies assets at low price to clear the debts.
Long Term Debt / Equity Ratio
P/E Ratio : Stock Current Price / Earnings per Share should be lower
Current Price of Share / Book Value Ratio
Gross Profit Margin %
Net Profit Margin %
Dividend Payout Ratio
Year on Year Growth % : Higher the value means, company performance is improving.
Quarter on Quarter Growth % : Higher the value means, company performance is improving.
Market Cap / Current Cash in Hand
Market Capitalization / Total Assets of Company
% of Shares Held by Promoters : If promoters is holding less than 50% or 40% you should be more careful before investing as risk is high in such stocks.
% of Shares Held by Foreign Investors: During market falling down if FII's percentage is more, you are gone. When they try to quit, your stock will feel down. When you find FII's are showing interest buy it and quit as soon as price goes high if you want to go with the news.
% of shares Held by Institutions: If local institutions % is increasing month by month means that company has probability that it is going to have good business.
Exports as Percentage of Sales
Above 3 factors i.e whether % of Shares Held by Promoters, % of Shares Held by Foreign Investors,
% of shares Held by Institutions whether increasing or decreasing?
9. How much is Company Paying Dividend?
You need to verify how regularly and how much dividend company is paying w.r.t Share Current Price.
10. How is the Company Management?
Verify the past performance and past conduct of Maangement. Whether any bad reviews about management? If company management is bad, do not invest.
11. Can you Invest in Loss Making Company?
Sometimes Yes. Let us say you have some house and it has not given for rent. Then you have to spend some amount for renovation. So you are ending in Loss. But you have a beautiful asset of house which has some worth. Many textile stocks in India around 2010-2014 who has good amount of land but making loss in core business, have made good amount of money by selling land or constructing properties on land. Example Bombay Dyeing. At some point of time it has very bad business. But in Mumbai it has good amount of land and land price increased by manifolds.
So answer is YES, if it has good assets and share price is trading at low subjective management of company is not bad and also if good business is expected in future.
12. How will be the Company Business in Long Term?
13. How much is Volume of Shares Trading and How much is Daily Turnover in that Stock?
Do not trade shares which has less Volumes in Market. While exit from stock it will be difficult. Again high volume shares also look Delivery %.
If Delivery % is good then people has interest to keep the stock, which is good signal for stock.
14. How are the Annual Results Numbers and How are the Quarterly Results Numbers?
See by what percentage year on year and quarter on quarter increase is there in Revenues, Net Profits. If the percentage is good, mutual funds will even buy at bit high prices. So you can enter early to mutual funds.
15. Does Insiders of Company Buying or Selling Shares of Company?
- If Promoters or Promoters relatives of Company buying the shares means, generally shares price will go up.
- If Promoters or Promoters relatives of company selling the shares means, generally shares price will go down.
16. Is the Company Announcing any Buybacks?
Company is sitting on good amount of good cash. If a good and genuine company announces buyback, then generally stock price will go up. Even before during board meeting also stock price will go up.
17. Will the Interest rates going to increase or decrease? Is that going to impact your Stocks?
Interest Rates increase is negative for Stocks especially companies sitting on lot of debts. As they need to pay more interest on debt. Again during this time companies which do not have debts will gain as mutual funds and investors shuffle money to this type of companies which are debt free and which has less debts.
Interest Rates decrease is positive for Stocks. Interest need to be paid by company reduces. It results in Net Profit increases.
18. Is the Company business is Cyclical? If so at what time, company stock will be up and when it will be down?
You have to flow trend and should play opposite game if you can invest money for one year. These stocks only raise in one season. Example Fertilizer stocks just before rainy season and during rainy stocks these prices go up. You have to sell at that time and not buying stocks. Once season is over after 2 or 3 months, stocks will fall down by 15 to 20 percentage. Invest in good seasonal stocks at bad time and wait for an year where the right season comes. Just before the right season, mutual funds and investors try to buy them. During peak price, sell it off.
19. Is the Stock Trading in Futures and Options?
Let me add a separate article for this. But few indicators here. If a stock is declared as it is going to be added to Futures, then stock price will go up. Vice versa also true. If a stock will be removed from Futures and Options Market, then that stock price will go down a bit.
20. Is Mutual Funds or FII's Buying or Selling Shares of that Company?
Generally if Mutual Funds or FII's are investing then stock price will rises for couple of days. Because by seeing them other mutual funds and FII's and couple of investors starts to invest in those stocks.
21. How the Government Stability or Decisions will impact Stocks?
In a country if Government is stable, Stock Prices will go up. If there is no stable market, Stocks will go down.
22. How much is Percentage of Shares hold by Management? Mutual Funds? FII's?
On news if Mutual Funds or FII's going to invest in particular stock or sector, that will go up. If FII's are buying, stock prices will go up. If FII's are selling, stock prices will go down.
23. How will be Country GDP? How it will impact Stocks?
A good GDP Growth, generally companies business is going good. So stocks will be in upward trend. If GDP Growth is not good then generally companies business is not good. So stocks will be in downward trend.
24. At what P/E Key Indexes of country are Trading at? How the different Key Indexes are Trading at?
Serious investors should make a chart with country and also p/e trading values of main indices. This will not help for day trading. This helps for Mid-Term investing.
25. How much time you can hold Stocks? Day Trade? Short Term? Middle Term? Long Term?
This is very important to consider. What if markets go in negative directions. Can you hold it for a long term until market will be in upward trend again? or Will you forced to sell at low prices to overcome your financial needs?
Strategies and Thinking mode in Day Trade, Short Term, Middle Term and Long Term should be different.
26. Very Important. Can you bear Loss instead of getting Profit?
During loss if you take something into heart deeply, better to stay away from that Stock Market. Do not go even Mutual Fund side as well. Actually they are similar to stocks trading only indirectly.
If you are planning to keep funds that you need in another 1 month or 2 months so that you cgran make some money in stock markets. This means you are in Wrong Track.
While day trading if you do not have psychology to quit with a loss, Day-Trading is not suitable. This will be specially tempting. Day Traders should be equally comfortable during profit and loss. Especially during loss lets say you are at negative 10000 then you might be thinking let me wait and quit when it comes at negative 5000. This is wrong strategy.
No affinity towards stock and No affinity towards loss. You should be able to quit sometimes even during loss. You should quit even from a good stock at loss during Day Trade.
More importantly you should not trade daily in day trading just for doing trade sake. You have to look for Very Good News and Very Bad News about a particular stock and about entire market. Day Traders can gain from Extreme Bad News and Extreme Good News Both.
27. What all the Things should be taken into consideration while you do Day Trading?
Whether any board meetings related to companies on that day or near by days.
Is there any Government Directions or Rules Changes will be there which will impact your trading stocks?
How the Global Markets Indices going to be? After you had enter into position you have to monitor Global Indices. In India, early morning you need to see how USA Dow Jones is performing, Nikkei of Japan and Hong Kong and Shanghai markets. In afternoon UK and Europe markets will impact sentiment of stocks a lot.
During results, how similar sector stocks are delivering results within the nation and globally. Say if Cognizant or Accenture is delivering good numbers then there is probability in India TCS, Infosys, Wipro, HCL Technology stocks may go up and vice versa as well. If Accenture or Cognizant delivering bad numbers, then in India these Software stocks may fall a bit.
Dollar Fluctuations. Especially Import and Export Companies will impact here.
Crude Price whether increasing or decreasing.
28. Do you know 5% to 10% Company Results presented across World is not Correct?
Manipulated numbers will be there in small companies in results. So better to focus on large caps or mid caps. If you are new to market, don't go to small caps stocks. No risk if you trade in Large Caps or Stocks which are there in Indices. Say S&P 500 Stocks, Nifty-50 Index Stocks in India, FTSE 100 in UK, EuroNext 100 in Europe like this. Large Cap stocks they will not do fraud generally.
29. Do you know sometimes, some company share prices will be taken up to take Loans or to do some Fraud?
Just to take loans from banks or for some purposes, few small companies will increase their share prices. Buyers and Sellers will be related to company. Sometimes they will show huge profits on books and even though no profits will be there to company. So be aware of such companies.
30. Are you buying Stocks out of your Savings or you are buying by Lending Money?
Dont Buy Stocks by lending money at any point of time. Understand stocks will not move in only positive direction. Stocks can fall also.
31. How External Factors will effect Stock Prices?
If Promoter is Selling Stocks: Mostly Stock Price has tendency to go down.
If Promoter is buying Shares: Mostly Stock Price has tendency to go up.
USD is Getting More Stronger against India Rupee: which means Local Currency value is coming down. Exporters in India will get benefit. Say 1000 USD is contract value for exporting products. So if Dollar is trading at 65 rupees, Exporter in India will get 65000 rupees. If Dollar is trading at 70, then Exporter in India will get 70000. In this case Export oriented Stocks in India will increase.
USD is Becoming Weak against Rupee: Importers will get benefit. Say for 50000 rupees earlier he is getting 8 mobiles and now he can get 9 mobiles by spending same amount of money. Import Stock oriented stocks will benefit.
Metal Price is going High: Metal Extraction and Mining Companies will benefit. So these stocks will go up. In this case Companies depending on Metals to manufacture products will go down. Reason is say earlier to buy material if company is paying 1000 now it has to pay 1050 or 1100. So operating profit will come down as entire cost is difficult to pass to customer.
Metals Price is going Low: Stocks of mining companies will go down and Stocks related to Manufacturing will go up.
Import Taxes are increased say on Electronics: Local Electronics manufacturing stocks will go up. Reason is because of import duties, external country electronic product which is selling earlier at 5000 rupees might now cost 5500 rupees. So local manufacture can sell his products at same cost. So relatively sales increases.
Crude Oil Price is Going Up: Negative for India. Because India is depending upon Imports of Crude oil. Need to pay more money than expected. So India has to cut down on other development plans.
Crude Oil Price is Going Low: Positive for India. India has to spend less than expected money to buy Crude Oil. These savings can be used for more development activities in India.
Interest Rates are Increasing: Companies which are having huge debt will fall and Companies which do have less debts or no debts will go up. Because mutual funds, Foreign Investors will sell of companies having more debt and shift to companies that has no debt or less debt.
Company announcing Buyback of Shares: On news before board meeing stock wlll go if there are more chances of buyback approval. On approval it will go bit high and post that if there is more time period to buyback then it will come bit down again.
Global Markets Indices are going High: This is for day traders. If on same day and previous day if Global markets are going high then domestic stocks may go high.
Global Markets Indices are going Down: This is for day traders. If on same day and previous day if Global markets are going low then domestic stocks may go Down.
Global Sector Stocks Announcing Good Profits: Global Sector Stocks if they has good profits, similar sector can be good in your domestic market. Let us say Software Companies in USA, UK has posted good profits, then in India Infosys, TCS, Wipro, HCL Technologies results can have more chances to report good profits. Short Term Strategy.
Banking Stocks: Looking NPA's and how much bad debts Bank has?. Looking P/E ratios, EPS, Book Value is not sufficient. Big Bomb related to NPA's can blast company profits at any time. Let us say a Bank has given a loan of 3000 crores of rupees to a bad company company and if mortage property is worth just 500 crores to 1000 crores. And further to this over a period of time interest is accrued and loan became 3000 crores to 5000 crores. So in Banks 5000 crores money is there. Now company is not able to pay it. Then company will get only around 1000 crores by auction. These 4000 crores will never come back to Bank. So understand what is NPA and how much is NPA's to a company?
Before Elections if Stable Government going to Form in Country: Stock Prices will have uptrend. Because Government can take stable decisions without easily getting influenced by other parties. Policies will not change frequently as Government can run for longer time.
Before Elections if unstable or hung Government going to Form in Country: Stock Prices will have downtrend. To protect the seat, government will not be able to take strong policies and easily gets influenced by other parties. Companies will be in doubtful position whether to invest or not.
Government Decisions: Take the initiatives Start Up India and Digital India by Narendra Modi and look at the corporate tax reduction by Donald Trump to increase employment in USA. So like these policies will help Government to create more employment which indirectly contributes to GDP Growth. So stocks will be upward trend.
Local Mutual Funds is sitting on Lot of Cash: This is very important factor. If Mutual Funds sitting on lot of Cash they have to invest even if stocks are trading at bit high. This is where you can play a parallel game along with them. But you should be very attentive and you should remove your eggs at right time.
Companies Indirectly Backed by Political Leaders: If any political party has strong chance of winning in elections, then that political party backed up companies can be invested upon. Officially Political Leaders can not hold ownership in companies. This news will always be unofficial news. If any political party has bad chances of winning elections then those stocks should be sold off even at loss just to get free from more losses.
32. Do Long Term Investment is Good?
Our answer is identify the potential stocks before its potentiality is known to whole world.
Lets take the case of top companies
- Apple World Top #1 Stock
- Reliance Industries India's Top #1 Stock,
- Toyota Motors #1 Company in Japan,
- BHP Billiton Top #1 Company in Australia,
- Royal Bank of Canada which is Top #1 Company in Canada,
- HSBC Top #1 Company in UK.
- SAP Top #1 Company in Germany
- Samsung Electronics Top #1 Company in South Korea
Now answer if we invest in any of these top companies will there be 3 times Returns on Investment in next 2 years. Answer is very difficult unless any miracle happens. So right stock at right time entry is what matters. If you want rapid increase it is not possible. But many of them can grow high when compared with Fixed Deposits.
If your requirement is better than bank interest rates then you can pick safe stocks which has less risk to fall.
So here first you have to question what you want exactly?
Generally it is better to do more research on mid cap stocks to get good returns by many folds. Again risk will be there.
Don't think my Father had invested in these companies 10 years back and these increased by 20 times and now let me invest in the same stocks and in next 10 years these will increase by 20 times. What you have to understand here is your father had invested when real potentiality of business is unlocked so he made huge profit. If you enter after its potentiality is identified by whole world and when the stock price reached high, it will not increase by many times.
Blind Long Term will not work out. In next 5 years, there will be stocks which will be trading at 10 times the price of stock value now and in parallel there will be stocks that will be trading at just 10% of stocks values of current level.
In simple words, let us say if stock is trading at 1000 then there will be stocks trading at 10000 and also stocks there will be trading at 100 level in next 5 years. So what you are investing is matters and when you are investing is matters and not blind long term investing?
Answer changes with time. Take the case of land rates. People who bought in period of 2000-2004, has made good money till 2012. Post that there is no good increase in land prices. Rather than Long Term, I say middle term is good choice. Rather than Middle Term, we say when there is more potentiality. And again before the whole world knows about potentiality. Follow market and take decisions along with market. Long Term Investment will not work always. When you smell negative sentiment will be there in market in early phase, sell it off. Again invest when the share prices reach good low prices where further fall scope is very less. Then invest in good stocks and wait for right period. Remember people who made investments in good stocks post 2008 recession fall has made good returns and not people who invested when the market is in full bullish trend.
Don't invest in Stocks or Companies which you can not understand just seeing the share price is increasing on previous day. It is very risky.
We want to automate the process over a period of time. So writing this notes for our personal purpose. We will add as and when if some additional conditions are identified.
While doing single day trading or short term trading or mid-term trading or long term trading, you have to see multiple conditions simultaneously into consideration.
More knowledge you have how in Share / Stock market moves and when it moves in positive direction and when it will move in negative direction, will help you gain money and reduce losses.
Any additional suggestions and conditions if you identify drop a mail to firstname.lastname@example.org. We will add them by reviewing so that it will help other investors like you.