5 Questions to Answer When Buying Stocks

3 Apr 2017by Research and Ranking

5 Questions to Answer When Buying Stocks

For most people, investing is all about finding the best stocks to buy now. But in reality, their key concern should be to understand how to actually profit from the stocks being invested in. So if you are looking for stocks to buy in India, then you need to be able to answer these 5 questions:

Q1 – Which Stocks to Buy?

All stocks have real businesses behind them. So you should be on a lookout for businesses that are run well (financially and operationally) by a capable and trustworthy management, have good future growth prospects and a reasonably big competitive advantage. Identifying such stocks of fundamentally strong businesses is the key to successful stock investing. More often than not, stocks of such good businesses do well in the long term. Finding such businesses requires skill, time and well-directed effort towards doing proper research. If this is not what you can manage yourself, taking help of competent investment advisor is a wise option.

Q2 – At What Price Stocks are Undervalued, Fairly Valued or Overvalued?

Once the stocks have been identified, you just don’t go out and buy them. You need to know whether they are rightly priced or not. This can be known by doing proper bottom-up research about financial parameters, competitor and sector analysis and various other factors that can impact the businesses. One also needs to properly assess company’s future prospects to arrive at a reasonable estimate of company’s intrinsic value. Depending on overall market sentiments and sectoral winds (headwinds or tailwinds), the stock might be undervalued or overvalued and knowing this is key to deciding when to buy and/or when to sell the stock.

Q3 – When to Buy the Chosen Stocks?

Now you know which stocks to buy and at what prices, the chosen stocks become over or undervalued. A smart investor always buys when the stock is undervalued. By buying low, chances of selling at a higher price in future increase, if stock selection has been proper. On the other hand, if the stock is bought when it’s overvalued, it’s possible that its price will fall in future to reflect business realities. And this can result in losses.

Q4 – How Long should you Hold it?

Investing in equities is best suited for long term. So if you are ready to hold your stocks for at least few years, then you have a high chance of making profits if the stock has been carefully selected (w.r.t. Q1) and bought at a fair price (w.r.t. Q4). It might take a few years for an undervalued stock to achieve its true potential (business as well as valuation growth). So consider holding stocks of good and fundamentally sound companies for at least 3 to 5 years, especially if you are confident about their future growth and rerating.

Q5 – When to Sell?

Selling a stock is the key to realizing your profits and moving ahead in your wealth creation journey. Assuming you don’t need money immediately for personal reasons, you should sell your holdings only when either or all of these 3 situations play out:

    • Past business growth has not been in line with expectations
    • Future growth prospect are not great
    • Stock has become highly overvalued and there are better reasonably priced investment options available

So these are the five key questions that you should try to answer when buying stocks in India. These will help you greatly while researching and investing in equity markets, with a goal of wealth creation through long term well researched stocks not just in India but globally.

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