By P Saravanan & Manas Mayur
As the Indian stock industry indices touch new highs, numerous investors have a single important query in their mind—whether they should really invest in more shares or wait. One of the keys to becoming a productive investor in the industry is choice of proper stocks. Let us go over some of the significant parameters that should really be viewed as by every single investor although picking a stock.
Earnings prospective
It is vital that investors verify no matter if the solutions / services of the businesses whose stocks they propose to invest in, have the prospective to improve its income in the future. Revenue can improve only when the demand for the solutions / services is there for a extremely lengthy time. Therefore, it is significant to evaluate and make certain that the solutions/services of the firm that you program to invest are not going to be redundant extremely quickly. Accordingly, choose stocks that have good earning prospective in the future.
Competition dynamics
Investors should really also spend focus to competitors dynamics in the sectors that they propose to invest. One should really choose sectors wherein the scope of any new competitor is somewhat tough. Companies in sectors exactly where massive upfront investments are needed and there are larger switching expenses for their solutions or services can be a protected bet for the future. For instance, the auto segment needs considerable initial investment upfront and continuous analysis and improvement price, which commonly does not enthuse any new competitors.
Uniqueness
Investors should really verify what is the uniqueness of the firm exactly where they want to invest. The firm can love sustainable earnings if its solutions or services are not challenged. The uniqueness could be of a perceived good quality which can not be matched by its competitors. It could be trust and or post sales encounter or reputation constructed by way of positive experiences, and so forth. Sometimes solutions in the industry are identified by their brands, either due to the fact the firm was the 1st to introduce such a item or due to the fact of a lengthy period of marketing, and thus in the consumer’s thoughts there is no replacement for them.
Management
It is extremely significant to assess parameters such as who are the promoters of the firm, their shareholding and active involvement in managing the affairs of the firm. Generally, when the promoters hold considerable shares and preserve on escalating their stake, it is a fantastic signal for the investors. Any notable reduce in promoter’s stake can be noticed as a red signal. Further, how actively they are involved in important managerial policies of the firm should really be observed by way of the monetary reports and communications from the firm.
Innovation
Consumer preferences and expectations are evolving and tough to predict. Therefore, it is significant for the businesses to constantly strengthen and innovate their solutions. Investors should evaluate no matter if the firm is spending sufficient sources on analysis and improvement, launching new solutions as per the specifications of the buyers, brand creating by way of ads or not. Though these costs could not assure the accomplishment of the solutions in the future, investors can appear at the previous records of the successes of every single new item launched.
While the above parameters are not exhaustive, they can definitely assistance in identifying fantastic businesses appropriate for investment in the lengthy term.
Selection criteria
- Check if the solutions/ services of the firm have the prospective to improve income
- Go for sectors exactly where the entry of a rival is tough
- Check the uniqueness of the firm or its solutions
- Know if promoters are escalating their shareholding and are actively involved in managing the firm
- Check if the firm is spending on R&D, launching new solutions as per wants of shoppers
P Saravanan is professor of finance & accounting, IIM Tiruchirappalli. Manas Mayur is associate professor, Goa Institute of Management