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.
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.
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.
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.
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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