Many often tend to get driven away by market behavior and make choices following market sentiments. As a rational investor, one should first understand opportunities and pitfalls associated with such stocks to make a well informed decision. We share with you some ground rules to do so:
1. How sound are company fundamentals?
Look at the balance sheet, profit and loss statement, assets and liabilities, market capitalization, shareholder’s equity and debt commitment. These would help you analyze whether your investment will give your return in long term or not. As a good investor, don’t get into speculative trading. Fix your time horizon and then assess the suitability of the stock in your portfolio.
2. What is the past track record of the company?
Past performance of a company often reflects in business strategy and competitiveness of a company. A comparative analysis of the company with the industry and market indices will inform you how the company has survived the difficult times and how it leveraged emerging business opportunities with respect to its peers.
3. Is the management of company competent?
A company’s performance can take different trajectory depending upon who’s leading the company. Familiarize yourself with current management and leadership of the company, their past achievements and more importantly stability in management. A profound and proven leadership could help you achieve your investment goals.
4. What are the future plans of the company?
Read more about the announcements and decisions made by the company and how company is developing and implementing its strategy for next few quarters and years. Upcoming projects and orders can showcase significant growth prospects. News about possible merger, acquisition, diversification, expansion etc. could have a multiplier effect on growth trajectory of the company.
5. What is the outlook of the industry?
Industries have their own cycles and are affected by external factors including global markets and government policies. Assess what are the growth prospects of the industry, how favorable are government’s existing and upcoming policies and how international markets are going to affect the industry. A positive industry outlook could prove favorable for investment.
Make Better Decisions
It is a common mistake to follow markets blindly. Market signals have different interpretations for different investors; it all depends upon your personal investment goals and strategy. Don’t grab or compromise on opportunity based on market movements, but apply basic investment principles to assess pros and cons and its suitability for your portfolio. Your analysis can help you make better investment decisions.