Some people make lot of money from stocks while majority of people either stay afloat or lose money. Why this happens? Certainly it is not a matter of luck that draws so many intelligent people to the equity market. There is obviously a grave science behind making profits from stock market investments. Understanding a few factors regarding the business stocks you are going to put your hard earned money will give you a better standing as an investor and help you achieve consistent growth over time. Let us introduce here a few of the most important points to remember for investing in equity.
- Understand how the company functions
The way a company functions and generated revenues guarantees its growth. This is why it is incredibly important to understand how a company operates before deciding to invest in its stocks. In this respect it is advisable to look for the business model characteristics suggested by the Harvard Business School. According to the think tank, a business model should be robust, self reinforcing and thoroughly aligned with the business objectives.
- Industry potential
The second most important thing is the potential of the respective industry. The company stock you are going to choose should belong to an industry that has the highest growth potential in the long run and offers great stability. Besides studying the past and present business dynamics of the industries, you also need to see in depth the opportunities versus the challenges in the time to come.
- Competition
Does the chosen company lead the industry or any particular niche? Even if the company is a comparatively newer one does it stand out with something that cannot be copied or offered by others anytime soon? The product line apart, companies in service sectors also can offer unique value proposition that other business brands cannot offer to their customers. Such competitive advantage and uniqueness of products and services is a crucial winning element for a business stock.
- Management people
Company management, particularly the top brass of the management us always considered to provide the backbone strength of any company. Often management alone decides the fate of a company. When studying the management credentials and background you need to checkout about their tenure in the company, the roles and responsibilities, experience in the industry, educational background, management style they are known of, etc. Stability in the company’s management is also another major consideration.
- Administrative policy
Administrative policies of a company which is often referred as the corporate governance basically looks after the shareholders interest and accordingly brings changes in the internal process, reviews the roles of management personnel and the accounts of the company. Corporate governance is crucial to ensure transparency while maintaining the clean business image of the company. It also takes care of the social responsibilities of the company through various projects and activities. Four major parameters that make a great corporate governance include leadership, transparency, accountability and compliance. Good corporate governance is a common trait of the most admired and successful brands.
- The balance sheet and reports
Finally, it is the numbers that are likely to offer a convincing note to the investors. If you like to see how the company performed in its business niche, there is no better way than to study the annual and quarterly reports published by any company. Such a report unveils s lot of credible elements about the business of the company including the shareholders, financial statements, risk management report, reviews and management discussions, accounting statements, auditors report, etc.
Balance Sheet of the financial statement of a company clearly declares all the assets owned by it. Balance sheet also shows the stake of the stakeholders in the company and the liabilities it has. Obviously the liabilities of a company should be lower than its assets to make it solvent in balance sheet. A company with too heavy burden of debt can be risky for investors.
- Evaluating financial performance
When it comes to investment, enthusiasm does not have much to say. Here the logical methods, particularly arithmetic works. That is why while evaluating financial performance of a company seasoned investors take the help of tools like ratio analysis.
As an investor you can compare the financial performance of a particular company with others in the same niche. You can take data from the balance sheets and various published reports and compare them among competitive companies of the same sector of niche to have a clear idea about the growth proposition. The ratio analysis can be conducted across various aspects including liquidity, efficiency, profitability, valuation and leverage.
- Source of earning for the company
Finally, as an investor you should also know where from the company generates revenues and what are the typical challenges and opportunities involved in it. The earnings made by a company can be from the core business or from several other sources that may not be there all the times in the future. Naturally, if there is a probability of a dip in the company’s earning in future time, investors are likely to be cautioned. Secondly, the variance of income and ratio between cash and cashless income over the years is also an indication of how solvent and financially stable the company is.
For example if a software company makes its major earnings from some other sources other than its software business, it shows that its proclaimed business is not established yet.
To conclude, we must advise investors to take a tap on the happenings in the stock market frequently to have a better idea about how it operates and how some stocks enjoy better growth and earning than its competitors. While in-depth research into market dynamics and stocks is the most important requirement to ensure assured growth and income, experience with stocks is equally important to emerge as an investor of credible portfolio and market knowledge. Stocks need continuous and systematic involvement than haphazard and sudden enthusiasm.
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Disclaimer: The views shared in blogs are based on personal opinion and does not endorse the company’s views. Investment is a subject matter of solicitation and one should consult a Financial Adviser before making any investment using the app. Making an investment using the app is the sole decision of the investor and the company or any of its communication cannot be held responsible for it.
