EXPLAINED: How to zero in on a stock to buy? Follow these 4 basic steps

EXPLAINED: How to zero in on a stock to buy? Follow these 4 basic steps

How do you decide on which stock to put your money in? Do you simply follow the advice of an analyst or is there a way to do your own diligence before you make a buying decision? Read here.

EXPLAINED: How to zero in on a stock to buy? Follow these 4 basic steps EXPLAINED: How to zero in on a stock to buy? Follow these 4 basic steps

Shopping for stocks involves multiple factors. Most investors depend on stock analysts, news, and market experts to make investment decisions, but at any point, when one starts taking investment decisions, there are four basic steps that can give anyone an idea about how a stock is likely to perform and whether money should be put in it.  
Before you start investing in any stock, a fair idea of the industry or genre of stock is most important. With that basic information, you can next try and zero in on specific company stocks.  

Here are the four steps to make your own fundamental analysis of the stock to strengthen your investment muscle: 


1. Review financial statements carefully 

The financial statements of all companies are available in the public domain. Before picking a stock, run basic research on a company’s financials. Look up their balance sheet, income statement, and cash-flow statements. Take an objective view of the company’s performance. The financial documents will give you some idea about the overall health of the company – how its profits are and what is its growth direction. Once you get a fair idea, you can then decide to invest in the company 

2. Analyse the company by industry standards  

After step one, you may choose to explore a few stocks. At this stage, run an industry-level analysis of the company. How is the company positioned vis-a-vis others from the same industry? How does it rank in its own industry category? Who are its competitors and how is it better or worse than the closest ones. Annual reports, analysts’ reports, stock-trade periodicals – dig these up and read to get a fair idea about the company in which you are planning to put your money.

3. Evaluate company value, prospects, risks 

Look at the valuation of the company and then analyse how its stock price compares. Stock prices are not just influenced by the profits of the company but also by the resilience and prospects a company shows in the face of global socio-political situations, health crises, and investments. Another way to check the value of a stock is to calculate the price to earn the ratio of a stock. A high price-to-earnings ratio indicates an overvalued stock; a low figure indicates an undervalued stock.  


4. Estimate a price target, zero in, buy 

Steps one, two, and three together, will help you converge to make a decision – on whether you should pick a stock or not. The final decision however becomes clear when you figure out the price target of the stock. The profile of the company, the value of its stock, and its prospects indicate how far the stock can move up in terms of price. If you are convinced about the prospects of a stock in terms of fetching gains for you in a certain time frame, that’s when you finally zero in and make a buying decision.  

Also Read: EXPLAINED: All you need to know about ‘stop-loss’ orders in 5 points

Also Read: EXPLAINED: What are blue chip stocks and why you should care as an investor

Published on: Jun 16, 2022, 4:24 PM IST
Posted by: Tarab Zaidi, Jun 16, 2022, 4:20 PM IST