How Do I Choose The Right Share
“It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.” – Warren Buffett. Is Reliance the best or will Wipro generate more returns? What is the right price to buy the share of Apple? Will Alphabet Inc. be profitable after 5 years?
With approximately 55,000 companies registered in the stock market globally, you have the option to buy shares of any of these companies. When presented with such a large basket to choose from, perplexity is apparent. Limiting the choices is the way to start. In simple words, when you have multiple companies to choose from, you have to limit and shortlist the companies that fulfill your desired goals.
So, before understanding the factors that one should consider before buying shares, let us first understand what shares are.
What are shares?
Shares are financial assets that denote ownership in the company. One share represents a portion of the company’s ownership that it is willing to sell in exchange for money. Companies have different goals to sell their shares, one of the major factors is to raise capital for further expansion.
Let us now look at the factors that can help you in choosing the right shares.
Module 1: The Personal Factors
To choose the right share, you must set your own goals and ambitions straight. The driving force behind buying shares is your financial gain. So, if you are clear with your investment motives, funding strategies, etc., it will be the first step in shortlisting the right shares.
Lay Down Your Investment Goals
Everyone has a different investment motive, it could be going for a more proactive investment and making risky purchases to get larger gains, or it could be a more laid-back, relaxed long-term investment strategy to invest in risk-free, low-yield shares. So first, it is necessary to set your investment motive clear.
Assess Your Risk Tolerance
A mistake that most beginners tend to make is the failure to set a limit on the initial amount of investment amount, which leads to trouble in assessing and managing risks. So first of all, it is necessary to manage the amount of funds that you want to invest and assess the amount of loss that you can bear comfortably. In short, identify your risk appetite and the investment amount in advance.
Identify The Type Of Investment
As we delve deeper into the stock market realm, things will start to bifurcate more, your choices will grow, your options will expand, and so will the need to make the right choice increase. So, a decision is supposed to be made between the choice of shares that you would want to buy. You can either buy Individual shares or invest in funds like mutual funds and EFTs. Let us understand what the difference is.
Individual shares mean you have a direct part of the company’s ownership
Mutual Funds are a combination of multiple shares, bonds, securities, FDs, etc. So this offers a more diversified option of investment.
Let us quickly list down the pros and cons of both
| Stocks | Mutual Funds | ||
| Pros | Cons | Pros | Cons |
| Offer higher returns. | Only one stock | Diversified | Offer moderate returns |
| No additional charges | More Risky | Less Risky | Additional charges for professional |
| Full control over investments | Requires more research | Managed by professionals | Less control over investments |
| Relatively more liquid | The process to enroll is lengthy | A simpler process to start investing | Relatively less liquid |
Module 2: The Company Analysis
The next step is to find the right company and evaluate its performance to find the right shares. It is necessary to have a basic idea regarding the company profile, its performance, and the management to get hold of the best shares that will perform well in the long run.
A Background Check
A basic fundamental research regarding the company that you want to invest in (via shares), is critical. This includes thorough research about the financial health of the company(annual profit and loss statement), and how is it performing concerning its competitors and the market in general. Having a competitive edge in the market can also be considered an additional advantage for the company’s share to perform well in the stock market.
You should also be aware of the driving force of the company, i.e., the core management team. Strong management can lead the company to sail through crests and troughs.
A Technical Research
Seasoned investors make use of multiple trend analyses and study complex financial indicators that might result in a better decision regarding the choice of shares. So if you’ve just set foot in the stock market, try to look for these basic trends before you buy shares:
Price Trends
A basic line graph, bar graph, or even a candlestick graph can be used to plot and easily evaluate the movement of the share price of a particular company. This can help you determine if there is any repetition in the pattern of price fluctuations or even predict any future rise or fall.
Volume Analysis
Trading volume means the number of shares that are sold or purchased in a given time period. If studied about the major events, then the analysis can also identify the type of disturbances/major events that affect the volume of stock. A comparison of the current stock volume with the average trading volume can also reveal significant information regarding the likeability of the share to perform better in the market.
Other Technical Indicators
You can also try to find patterns with the help of statistical tools like moving averages, relative strength index, Bollinger bands, MCAD, etc. The basic idea is to identify patterns and trends that you can follow to predict future fluctuations.
Module 3: The Market Factors
After you have assessed the personal factors as well as the company’s performance, that will set you straight in the direction of shortlisting the right shares, now it’s time to add speed to the boat to sail right through. The stock market in general is very volatile and fairly unpredictable, yet different analyses can guide us.
Look For Market Trends
The famous Financial crisis of 2008 could have been managed if market factors like banking stress, asset price inflation, rising subprime loans, etc. had been assessed promptly. This is one of the greatest examples that signifies the importance of studying the market trends
Every catastrophe gives a warning, and so does the fall in the share prices in the market. A good investor needs to keep an eye on the fluctuating stock market trends.
Check The Industry Performance
It is crucial to perform all the mandatory analyses regarding the broad industry classification that you want to invest in, its growth prospects, and its current market position. An industry continuously performing well in the stock market should be your first choice for a relatively safer investment.
Market And Economic Conditions
Look out for the basic changes in the market. Let’s say, the stock market is bullish, it shows that the investors have trust in the market, and this can be a good time to invest. On the other hand, if the stock market is bearish, it means that the market is not performing well, and the investors are losing trust in the market, so it is generally not considered a good time to invest.
The economic conditions of the economy can also be considered to decide about the shares that you buy. Factors like GDP, inflation, unemployment rates, etc can be critical in deciding the future performance of the market.
Miscellaneous Factors
There cannot be a fixed number of factors that can help you figure out how to choose the right share. Since the stock market is dynamic, the factors affecting the changes in stock prices and trends are also innumerable. Yet, here we are listing the most common of the factors that you can study and identify to choose the right shares. Here are a few factors that you can add to the list to make a more comprehensive decision.
A Diversified Portfolio Is The Key
A portfolio is a basket of multiple stock market items including stocks, funds, other securities, mid-cap, large-cap shares, value stocks, etc. It is one of the best ways to minimize the risks associated with the stock market. Having different types of stocks and funds helps in reaping benefits from multiple sectors and domains along with improving risk tolerance and giving more flexibility in investments. With changing market trends, it is necessary to regularly update your portfolio along with the changing market trends.
Identify the Risks
Along with identifying your risk appetite vis a vis the investment amount, it is also necessary to calculate the risk associated with the stocks that you want to buy. There are multiple statistical tools like beta calculation, CAPM, Value at risk, standard deviation, etc, that you can use to objectively identify the volatility associated with the respective stocks
Final Word
Choosing the right shares is fundamental to stock trading. So, keep the following points in mind if you want to know how I choose the right share:
- You should start by choosing your own financial goals,
- An assessment of the related fundamental factors.
- Keep an eye on the unforeseen market trends and the current related events that might influence the shares.
- Manage risks
- Regularly update the portfolio
If you keep the following factors in check, the stock market will be a smooth road for you!
