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Rabu, 26 Mei 2010

How to invest in stock market? - Short Listing stocks

Stock Market movements and emotions

A typical week for an early investor -

You are new to stock market. The stock market index has recently gained over 10% in the past one month. Being excited about the movement you have a look at top gainers in the past week. You pick one or two stocks and then justify why these stocks are one of the best available, and also why the price is reasonable. You buy them, wait for a day or two. Unfortunately the stock market retreats and you lose over 10% of your invested value. You then start doubting your stock picks and mange to find a flaw. You decide to rearrange your portfolio and sell a portion of it and buy some of the other stocks which have been relatively stable during the recent market fall. But alas, in the coming week, the stock market rebounds and you realize that had you kept your earlier stocks, you could have done better... frustrated, you start searching the internet for investing strategies..

Does this sound familiar? This is what typically happens to new investors in stock market who do not have a fixed investment strategy.

Have a fixed criterion to short list stocks

It is important to have a fixed idea of what is the minimum you expect from a company whose stock you may consider for buying. As an example, I will give the following criterion which I try to follow.
  1. The company must be fully functional and shown a positive net profit for at least 5 years.
  2. The average topline growth of the company must be at least 15% in the past 5 years.
  3. Minimum Operating Profit margin of 10% and ROCE (return on capital employed) of 12%.
  4. The current stock price must not be more than 80% of the 52 week high price. (this is to avoid past experiences where I have invested right when the price was at its maximum, and had to pull out when the price plummeted).

It is also good to follow other rules of diversification (not putting most of your money in your top favorite stock), always keeping some cash ready to buy more if the price drops further etc. These other strategies will be discussed in later posts.

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