How To Select A Stock To Invest In Indian Stock Market For Consistent Returns?

 A beginner’s guide on how to select a stock to invest: So, you are interested in the stock market and want your money to grow. You have read a number of investment blogs, financial magazines and subscribed to the Stock TIPS and recommendations from different brokers.

8 steps to select a stock to invest in Indian stock market

Here are the eight essential steps (or checklist) that you need to follow for picking winning stocks to invest in Indian stock market:

1. Does the company have good fundamentals?

To find the answer to this question, there is a 2-minute review to find a fundamentally strong company. Using this review, you can separate out the healthy companies so that you can proceed to investigate further. If the company is not fundamentally strong, there is no need to learn more about its products/services, competitors, future prospects etc.

2. Do you understand the products or services offered by the company?

After separating out the companies based on their financial fundamentals, you need to investigate the company. Understand the company first. Learn about its products and services. It’s important that the company is easy-to-understand and has a fairly straightforward business model.

You might ask why is it so important to understand the company. Let’s understand this with the help of an example. Assume that you have to choose a classmate for whom you’ll be paying for 36 months of expenses. In return for which he/she will give you a quarter of his/her earnings thereafter for the rest of their lives. Whom will you choose?

While choosing, you must be thinking to select the one who is most likely to have a great income in the future. Further, will you choose a guy/girl whom you know nothing about? As you don’t know that person, there is no way that you can predict how much he/she will earn in the future. The same goes for stocks. If you can understand the stock, you can easily take a good decision whether to buy, hold or sell the stock at any time. Hence, always invest in the companies that you understand.

3. Will people still be using this product or service in 15-20 years from now?

The next step is to ask about the life of the company. Always look for a company with a long life. Such companies have huge growth potential and the power of compounding applies to such companies. Avoid investing in companies having a life of just a few years.

For example, do you think people will be using soaps in 20 years from now? The answer is ‘Yes’. It’s been there for over 100 years and will surely continue in the future. Maybe the fragrance will change, but the soap will be there. Now, take another example. What do you think about a pen-drive or USB manufacturing company? Do you think that people, 20 years from now, will still use pen drives? The answer is no. Overall, select only a stock to invest in Indian stock market that will last for the next 15-20 years.

4. Does the company have a low-cost durable competitive advantage?

Invest in companies with ‘MOAT’

This ‘MOAT’(measurement and operations analysis team) concept was popularized by Mr. Warren Buffet. A moat is a deep, wide ditch surrounding a castle, fort, or town, typically filled with water and intended as a defense against attack. Some stocks have a similar moat around them. That’s why it’s really tough for its competitors to defeat them in its sector.

For example, Colgate! It has become such a common name in Indian homes that Colgate is considered as a synonym to toothpaste. Another example is Cadbury– the chocolate producing company. This company is dominating its industry and the people are even ready to pay a lot more to buy its products. Similarly, Tata Motors has got a moat in ‘truck’ sector. Tata Trucks has been in dominating in the Indian automobile sector for the last 5 decades.In addition, while selecting an ‘unbreathable moat’ look for such companies in which the switching cost is high. For example, Banks. How rarely people change their bank accounts just because the competitor is giving 0.5% more interest rate. Coal India, ITC, Asian Paints are few of the other Indian companies with big moats.

5. What is the company doing that its competitors are not?

Find the unique selling point of the company. Learn what this company is doing which it’s competitors are not.

To understand better, let us analyze the Indian automobile sector. There are a number of automobile companies in India. However, when we consider the passenger vehicles (Cars and SUVs), Maruti Suzuki is the leading company in India. There are a number of competitors against Maruti in this sector like Tata Motors, Hyundai, Honda, Ford etc.

Nevertheless, Maruti Suzuki is dominating because of the easily available service centers that it provides. Maruti’s service center can be found on every corner of the streets. It’s really simple and easy to get a Maruti car serviced even in small cities. On the other hand, try to get your ‘FORD’ car serviced. You will rarely find any authentic ford service center around you. That’s why people prefer buying Maruti cars in India.  And hence, Maruti Suzuki is able to increase its sales consistently and give good returns to its shareholders.Overall, investigate first what the company is doing that its competitors are not before you select a stock to invest in Indian stock market.

6. Does the company have a big debt?

Big debts in a company are the same as the big hole in the boat. If the hole in the boat is not filled soon, then it won’t be able to cross the long sea and will definitely sink. When you select a stock to invest in Indian stock market, read its financial documents carefully. Avoid companies with big debts. Many times, the accountants use the financial loopholes to hide the debt in their annual results. However, if you read the financials minutely, you will be able to find these debts, as the financial sheet always needs to be balanced.

While investing the companies in the banking sector, look for its Non-performing assets (NPA). Avoid companies in the banking sector with huge NPA’s.

7. Is the company’s management efficient and qualified?

This is one of the most crucial questions to ask before you select a stock to invest in Indian stock market. The management is the soul of the company. A good management can prosper the company to new heights. On the other hand, a bad management can lead to the downfall of the company. Hence, it’s really important to research carefully about the management of the company that you plan to invest in the Indian stock market. First, do some research, and find out who is running the company. Among other things, you should know who its CEO, CFO, MD, and CIO are along with their qualifications and past experience. Next, here are a few points to check the efficiency of the company:

 8. Is the company constantly in the news and overly popular?

The stock market is based on the sentiments of the people. Consistent news affects the expectations and decisions of the public. Stocks, which are popular in news, can be inflated by the hype of the media. As people expect great results from such companies, even after giving good returns the stock prices of such companies fall. That’s why try to avoid buying stocks of such companies for easy returns. The hot stocks are subjected to market volatility and the boring stocks are the one, which gives the best returns.