Stock Investments – 3 Simple Rules

You live a comfortable life and have some extra money to invest. Investing in direct stocks can be a bit risky and you may end up burning your fingers i.e money in this case. The point here is that stock investments can be risky.

So you ask a friend who has made it big in the stock market for some tips. Your friend, who just may have got lucky, rattles off the tips like a Wall Street expert. The only problem is that he is neither a stock broker nor an expert. So before you even think of investing in a particular stock follow these simple rules in the given order.

Rule # 1

Don’t Check Out the Stock, Check the Company

There are many companies whose stock prices have spiraled quickly and crashed even quicker. Real estate stocks are a typical example to that in the recent correction of stock markets in 2011.

It is of overriding significance that before you invest, thorough research needs to be done about the company whose stocks you intend to invest in.

First check out the business of this company, and see if you understand the business. If you do not have a clue, treat it as a red flag and forget about this company. On the other hand if you do understand the methodology and are impressed by the vision and mission statement of a particular company, research the following first:

What product is the company selling or manufacturing, the information to which is given on the company website
How does the market rate the quality of the company’s product?
Is the product which the company is selling is for the conservative market or for the upcoming generation? Remember new products with new technology are generally in demand and it reflects on the financial health and growth of a company.

For example: Wireless Communication companies, high end tablet manufacturers like Apple, Samsung etc

How modern and effective is the company’s R&D?
Check out the history and consistency of the company in generating profits which you can check from sources like money control

Rule #2

Choose the Right Stock Broker

It is rightly said in one of the advertisements of a renowned stock broker “Choosing the right broker is more important than choosing a right stock.”

When choosing a stock broker one needs to be very, very careful. You should smell a rat when a stock broker promises you phenomenal returns with low risk investment. If he does so, that should ideally be your last hand shake with that stock broker.

Avoid the broker who offers you so called “short term trading tips” which guarantees him to earn stock brokerage but whether you will earn Rs 10 or lose Rs 100 is still a question which nobody knows.

Select a stock broker keeping in mind the following points:

Ask him for references and then make a call to existing clients who have benefited from him
Remember blindly following a stock broker can have disastrous consequences as stock investments are generally risky. If you are already tied up with a broker, ask him about his educational qualifications and experience in dealing with stocks either investing or trading. A good stock broker will point you to the right direction and to some extent you may have to follow his or her advice
Research the ability of your stock broker by making small investments at first

Rule # 3

Choose the Right Stock

Looking for a good stock can be compared to the vegetable section in a departmental store. Everything looks fresh and delicious. You need to pause here and look a bit closer. You will see that that the vegetables look fresh as the water sprayed on them reflect light from the bright concealed overhead luminescent lights

Check out the sales revenue of the company for the last 8 quarters
The sales revenue determines the demand of the product and reflects on the value of the stock
See if the debt to income ratio is balanced. A higher debt means that the company is in poor financial health
Check out the liquidity of the stock. Anything above 60 % is indicative of a good stock. All of the above information can be checked on www.rediff.com/money or www.moneycontrol.com

Conclusion – Stock Investments

Planning is important for stock investments. You are required to follow the rules mentioned above in the order indicated. Leaving out any step in between may lead to a situation where you may run into a loss.

As a general rule, it’s best to hold stocks from several different industries. That way, if one area of the economy goes into the dumps, you have something to fall back on.