How to decide which stocks to invest in

1) Research each company and sector

Before putting your hard-earned money into a company, it is very important to learn about the company. You should be aware of the company’s fundamentals, its future prospects. One should know about government policies and industry regulations and its corresponding impact on a company’s long-term potential.

2) Earning Visibility

The market is always a slave of earnings. There can’t be a better trigger for a stock than its future earning potential. Understanding the company’s products/services, clients, market size can be important indicators to determine a company’s future earnings prospects.

3) Competitive Analysis

A company’s strengths and weaknesses can be judged best when it is pitted against its peers. It is important to determine where a company stands within the industry that it operates in and how it fares on various financial parameters. A comparison with the same-sized company with similar offerings can give a better idea about a company’s position.

4) Check Financial Leverage

The balance sheet of a company is in a way its health card. How a company is able to utilise its financial resources-internal, as well as external speaks volumes of its operative and financial strength.

An investor should beware of a company with high debt. Debt to Equity is the best ratio to determine the leverage of a company. A lower D/E ratio is considered better under the usual circumstance.

However, it is best to compare a company’s leverage against its peers to determine the acceptable ratio for the company of your choice.

5) Price to Earnings Ratio

P/E is the widely accepted ratio that indicates whether a stock is overvalued or undervalued. The acceptable P/E ratio again varies from sector to sector. Hence, peer comparison gives an ideal P/E that could be assigned to a stock.

Apart from these factors, the management’s track record and effectiveness of its leadership team are crucial to a company’s fortunes. A well-managed company often enjoys the highest amount of trust from investors.