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HomeStocksA Step-by-Step Guide to Choosing Profitable Companies

A Step-by-Step Guide to Choosing Profitable Companies

If you are an active stock market investor, you’ve likely encountered numerous calls offering tips and services, urging you to buy or sell stocks based on their recommendations. These callers often provide free advice initially and then propose premium channels or subscription services for more lucrative tips. If you’ve experienced such calls, this article is tailored for you. Here, we will delve into simple steps to identify promising stocks or companies to invest in, rather than relying on these dubious callers and tips.

Becoming self-dependent is undoubtedly beneficial, whether you are involved in the stock market or managing your everyday life. Why rely on others when you can handle things independently? All it takes is learning the fundamentals, staying informed, and remaining invested to enjoy the journey.

Profitability Check

The initial criterion to assess a company is its profitability. This assures that the company is generating profit from its operations. However, it’s not just about profitability; consistent and growing profits are particularly desirable for investors. As shareholders, you essentially become part-owner of the company in proportion to your share ownership.

Furthermore, paying attention to the Earnings per Share (EPS) is crucial. Ideally, the EPS should exhibit a growing trend. In cases where growth isn’t apparent, stability is essential, and volatility should be avoided. This ensures a more reliable and predictable investment environment for shareholders.

Read: Understand The Power of Earnings Per Share (EPS)

Trend is your Friend

When analyzing stocks on charts, it is essential to ensure that the stock is in an uptrend rather than a downtrend. Keep certain stocks on your radar that have been consolidating for an extended period. If a stock breaks out of consolidation and shows a clear breakout, it presents a good entry opportunity.

To identify if a stock is in an uptrend, observe its price structure. Look for the stock making higher highs or higher lows. Alternatively, use simple moving averages; if the stock price is consistently above the moving averages, it indicates an uptrend.

Outperform Benchmark Index or Sectoral Index 

The next step to consider is whether the stock you have filtered out from all the listed stocks in the Indian market is outperforming its benchmark index or its sectoral index. This means that if the market is in an uptrend and the benchmark index (Nifty50) is making higher highs, generating over a 10% return, the selected stock should have a superior performance.

For instance, if the identified stock has rallied only 9% during the same period, it is considered to have underperformed the benchmark index. To be classified as an outperforming stock, it should have yielded a return exceeding the benchmark, such as over 10% in this scenario. Therefore, if the selected stock achieves a return of 10% or more during the same period, it is considered to be outperforming.

Outperform Its Peers

The fourth step you should follow is to compare the selected company with its peers. If the company operates in a monopoly, that’s great. However, when peers are available, it is imperative to make a thorough comparison between the selected company and its counterparts. Evaluate their financial performance and stock performance, providing a comprehensive understanding of how your chosen stock stands out in the crowd. This comparative analysis helps determine whether you have indeed selected a strong and promising stock.

Conclusion 

If all the above criteria are satisfied, congratulations, you have identified a potentially good stock for your investment. Additional information can be gleaned from the stock’s chart, and over time, as you repeat these steps, you will likely make adjustments and incorporate more steps based on your knowledge and experience. This iterative process enables you to develop your own strategy for selecting quality stocks for investment.

Disclaimer: This blog has been written exclusively for educational purposes. The securities mentioned are only examples and not recommendations. It is based on several secondary sources on the internet and is subject to changes. Please consult an expert before making related decisions.
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