With more than 5,000 listed companies in India, shortlisting stocks for investment becomes a very challenging task. That's why it is recommended to follow a checklist-based approach for screening quality companies from a plethora of options available.
Here are significant factors that one should look for while shortlisting stocks:
Stick to businesses that are familiar
According to Pranjal Kamra, CEO of Finology, a common but most significant point is, sticking to businesses that are familiar - It can be a brand, the investor or an industry where he/she work or have a good understanding of the operation.
"If already shortlisted an industry, investors can start the research by analysing the market leaders or companies that are gaining market share recently,” Kamra opines.
Consider competitive advantage of company
A significant factor that most of the newbie investors forget to consider is the economic moat or the competitive advantage of the company.
Before analysing the financial statement or valuation, Kamra suggests investors to ensure that their target company has some kind of moat, as it ensures the company’s survival for a long-term period.
Look for company’s business quality
According to Amarjeet Maurya - AVP - Mid Caps, Angel Broking Ltd, it’s equally important for investors to look at the company’s business quality, focus on its market share, determine its potential growth on the basis of its plans to launch a new product, diversifying segments, expanding distribution, etc.
"Further, see the company’s valuation in terms of price-to-earning ratio within its segment. It should be reasonable,” Maurya advises.
Check company’s financial record
As per Maurya, the company’s promoter should be good with clean financial history.
"Check the company’s financial track record for the past 4-5 years and ensure there is relevant margin growth and profitability. Make sure return on equity is higher than 15 percent," he opines.
After considering all this, it's crucial for investors to shortlist the stock, invest and continue monitoring the developments every quarter. If their growth story doesn’t work, they should exit!
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First Published: IST