7 things to look at before buying stocks [Checklist]

DWAIPAYAN REGMI

Tough thing to do in the share market is to pick the winning stock which will give consistent returns for a longer period. Was it wise for you to invest in share market ignoring those 13% Fixed Deposits, which existed some times back? Investment is filled up with risk because there is not an investment in the absence of risk. This stock trading can make you master, or the slave. You might be a new one in stock trading, or it could be that you have gathered huge experiences.

American investor, and well known real estate attorney once said – No wise pilot, no matter how great his talent and experience, fails to use a checklist. It is therefore important that you prepare a checklist before purchasing any share market. The following are a few things that you seriously need to look at while buying stocks from both the Primary or Secondary Market.

Company’s work

What products or services does the company offer? How sellable is the product or service? How does a company make money? Because, at a large number of times, people ignore the actual work of the company and make purchases going with the rumor. It is important to understand the actual work of the company. Didn’t people all invest in Satyam Computer Services Limited (SCSL) in India without even knowing what it does?

Promoters/Owners of the company

The CEO and the management team has an important role to play in shaping the direction of any company. It is important to know who are the promoters and owners of the company. Are they entirely new? Do they have prior experiences? What is the shareholding pattern of the company? Is it a family-owned company or professionally managed? These aspects play a significant role in the stock market. In the past, people used to rush for investing over mutual funds without even knowing their top persons.

Profitability

A lot of times, Nepalese investors rush towards investing without even knowing the profit-generating ability of the firm. Be it in that hydropower sector, or other new firms – people used to queue up. In the end, here at this time, they are in a panic. It is therefore important to figure out how capable is the company in generating profit and sharing dividends. A company going in loss will no longer distribute bonuses or dividends.

Past Performance of the Company

It is important to check how the company performed during the past years. So, what was the company’s position during the earthquake? Or at the time of blockade? How did the company perform when the economy was high and low. Their income statement and cash flow statement with sales and profits should be carefully analyzed.

Balance Sheet of the company

How much liability does the company own? Our shareholder’s equity increasing or decreasing? What is the position of assets – is it grow over time? What proportion of inventories, receivables or payables does the company hold? That should be analyzed beforehand. Because, once an investor looks into these aspects, no matter where the share market goes – their investment will not drop down and turn into a waste.

Fraud or Scam cases

What is the record of those promoters or owners? Had this company ever been fined or punished by the judiciary or regulatory body? Had it ever been a victim of any big rumors? That has to be clearly understood. Because those can make a significant impact in the long run.

Debt and valuation of the company

Short term and long term debt that the company holds is a key indicator that explains the company’s performance in the long run. Hence, these aspects should be carefully studied. Meanwhile, how is the stock valued? There are a lot of companies that are undervalued in the market – they are something to be thought of. Again, it is important to identify overvalued as well, which should be kept away from the very beginning.

Conclusion

There certainly remains uncertainty in the share market. You never know when the green lights could go dim and get into the red with massive downfall. But, investing in worthy companies will never let you down.

Investopaper

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