Things to Remember While Selecting Top Stocks For An InvestmentSeptember 30, 2021
Investing in the stock markets requires one to be practical and mindful. You can really expect to gain higher returns by making random investments without performing any research and analysis. Instead, if you want to become a successful investor and maximize your profits, then you must find and invest in the top stocks. So, how to find such top stocks?
In this article, we will discuss some important things you need to consider while selecting the top stocks for your investment portfolio. Let’s start!
Things to remember while selecting the top stocks
Following are the points that will help you choose the most valuable stocks:
Begin with your research and stock analysis
After you finally decide to enter the stock market, begin by doing your homework. Your goal should be to find the top stocks, especially if you are planning for a long-term investment. So, before you purchase any particular stocks by putting faith in a company, do an in depth research. This should involve taking a look at stock’s performance and fundamentals to learn its viability and to determine whether or not it will suit your investment portfolio.
Although this step sounds basic and easy, it is neither of the two options. It is the most important as well as complicated step. So, it’s always better to take help from smart tools like stock screeners, which make the research process quick and less daunting. [Check out the below links for top stocks:
Compare the trends in earnings growth
Next thing to consider while selecting the top stocks is the earnings growth of the respective companies. Look at the earnings graph and check whether the earnings are increasing or decreasing. If the earnings are growing with a consistent rate, then it’s a good indication and you can shortlist this stock for your purchase. Even if the earnings are small but regular, it is considered to be much better than stocks with high but irregular earnings.
The earning trends of a company indicates how good or bad it is performing and also helps you in predicting the financial position of the company in future.
Consider the position of company in the market
When you select the top stocks, it is important to consider the position of the company in the industry and its target market. You should learn how well it’s performing as compared to its competitors, and where its peers see it. This will help you determine the future potential of a company or individual stock. One common mistake most investors make is investing in a top company just because of its fame. See, there is no guarantee that a popular company is always performing better than its competitors. There are chances of it under a huge debt or inconsistent financial health. So, always research and find out the actual position of the company in the industry.
Look at the Debt-to-equity ratio
Make one thing very clear, all companies carry some amount of debt, even ecommerce giants like Amazon and Walmart. So, a good company isn’t the one without any debt, but it is the one that is capable of paying its debts as quickly and as efficiently as possible.
You can use a company’s debt to determine its financial health. Look out for the companies with higher debt as compared to their equity, or simply their debt-to-equity ratio.
To find this ratio, look into a company’s balance sheet and divide the total liabilities by the amount of shareholder equity. The companies with lower debt-equity ratio are best to invest in.
Check price-earnings ratio
The P/E ratio, or price-to-earnings ratio is another important metric to consider while selecting the top stocks. It helps in determining the performance of a company. More specifically, it tells you how well a stock’s price is performing with respect to the earnings of the company.
P/E ratio is one of the most important metrics for fundamental analysis. It tells if a stock is overvalued or undervalued. To determine this ratio, divide the stock price of a company by its per share earnings. For example, if a stock is trading at $20 and the per share earnings of the company is 1.50, then P/E value will be approximately 13.
Using the P/E ratio, you can compare different stocks within the same sector or industry.
Check for the dividends
The company that pays dividends to its shareholders is often the one with better financial health and stability. This is especially true if the company is consistently increasing its payouts at regular intervals. However, steer clear of the stocks that are offering a very high dividend, it might be a sign that the company is getting desperate to attract investors.
Stock-picking can be a challenging process, especially when you’re determined to pick the top stocks. Hopefully, by taking all the above-mentioned factors into consideration, you will be able to make a better stock selection.