7 Question to ask before you invest in a Stock

Choosing the right company to invest in the first step in building a Strong Portfolio, 

But wait, when there are more than 5000 companies are there, which one to choose from?

Lot of people invest in stock market based on the recommendation or tips from their Friends, Family or just by following Big Investors. When the recommendation goes wrong then they blame the stock market and move away from investing, rather than doing their own research on investment

These 7 steps / questions will help you to choose the right stock to build your Strong Castle of Financial Portfolio.

  1. What does the company do?

Few of my clients who have invested in penny stocks through anonymous Recommendation and these stocks are 50% to 80% down from the invested value. Some of the stocks are not even trading in the Stock Exchanges.

Before you invest one needs to understand about their Product / Services, Business Model, Distribution etc. it is just not investing in stocks, it is all about taking a ownership of a company.

  • Who runs the company?

Also it is pertinent to understand the Promoters, Owners, Share Holding Pattern, Management & Leadership Team.  Is it a Family Managed or Professionally Managed and credibility of Board of Directors.

  • How much profits the company made in last 5 years?

What is the growth in the profit for last 5 years, how much is Gross Profit Margin, operating profit margin and Net Profit Margin. How is the YOY Growth in the profits?

  • Does the company have sustainable competitive advantage?

A good business is a strong castle with a deep moat around it, and how untouchable is the castle – Warren Buffet. Likewise understand the competitive advantage of the company and how strong their innovation is and their New Product Line up.

  • How strong is the balance sheet of the company?

How much the company has debt, How are the revenues, is the T/O are increasing, how much shares the owners pledges, These indicators can show the actual health of the company.

  • Is the company in news for wrong reason?

Never invest in a company if its has any scam or bad corporate history in the past. Just so a research on the Google and have this info handy.

  • How is the stock Valuation currently?

It is significantly important to obtain a stock at right business valuation. We should do your assessment before you invest in a stock, this will help you to understand the actual worth or value of the company in terms of market competition, asset values, and income values. There are indicators like PE Ratio, Book Value, PEF Ratio & ROE will help us to understand the levels of the stock.

Conclusion

You should not be investing all of your money in stocks, Understand your Return Expectation, Time Frame, Risk Tolerance and your Financial Situation and start investing in Equity market. Stock Market investing is more rewarding opportunity and one cannot accelerate his wealth without investing in Stocks.

Sathish Kumar

Equity Fund Manager | Wealth Consultant | Blogger

Email: creatingwealthadvisory@gmail.com

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