Factors That Should Influence Stock Purchase

There are a number of avenues for investing. Some people go for fixed deposits, while others prefer shares or mutual funds, and so on. Compared to an investment in fixed deposits, an investment in the stock market can potentially give higher returns. Higher returns cannot always be guaranteed since the stock market, by its very nature, is not very predictable. Instead, you can make an informed decision regarding how a given stock may perform. This can usually be understood from different cues including stock price history and company performance among other factors. BankBazaar has related information regarding certain specific stocks, indices like Nifty 100, Nifty 50 or other Indices. It will give you the stock performance, price history, company history etc. So what are the factors that should influence which stocks you buy? Here is a list:

The way the company makes money

This is one of the most critical things to know if you want to invest in a particular company. If you want to know how a company has performed in the past or if you want an indication of future performance, you first need to know how the company makes money. The method by which a company makes money is considered its business model. As long as the method is legal and profitable you can consider investing in the company. The more unique and sustainable the business model is, the better it is for the company and thus the investor. This is because the unique nature will help the company retain its originality and protect it from changes that may affect other companies in the industry. Sustainability is important in order to ensure that the company will endure for years. If not, the company will go under loss soon and result in a loss for the shareholders. Studying the business model is a good way to identify potential issues.

The senior management team that runs the company

If you want to know if a company has a unique and sustainable business model, the simplest way to know it is to see who heads the company. In both normal times and trying times, having a good leadership can set a company apart from others in its segment or industry. The better the management team that heads the company, the better chance there is of the company having a unique and sustainable business model. Typically, people who head such companies will have a wealth of experience which will serve them well. Also, people who have experience will also be able to understand market behaviour to the extent that they will be able to safeguard the company from common issues.

The dividend payout

In order to ensure that you do not have to sell your stocks at a profit each time in order to acquire some liquid cash from your investment, you can invest in a stock that pays dividends. This way, you get some amount of money at specific time periods as designated by the company. The payment is based on the company’s performance during that given period and the percentage of the dividend is also set by the company. This will ensure that you can continue to hold onto your investment while you do get some return. But keep in mind that not all companies will pay out dividends. A related concept here is the idea of a dividend yield. This value is calculated by dividing the dividend per share by the current share price. In general, the higher the value of the dividend yield, the better it is for the investor. But if a company does not have a high dividend yield, it does not always mean that investing in that company is a bad idea. The idea of a dividend yield is connected to the idea of actually paying out a dividend. Some companies may not choose to pay out dividends but investing in them could still prove beneficial.

The PE ratio

The price-to-earnings ratio is another thing that should be kept in mind while investing in stocks. This ratio is key to understanding whether the current price of the shares of the company is a high value or not. If the value is very high, it can be understood that the company’s shares are being boosted in value because investors are showing a lot of trust in the company. The price is an indicator of whether the stock is being highly valued or undervalued.

The debt-to-equity ratio

This is the ratio that indicates whether the company is in a position to cover its debts or not. The ratio by itself is calculated by considering the total debt and the equity of the company. The lower the value of this ratio, the better it is for the company. Thus, while investing you can look for a company with a lower value so that you can be sure that your investment is in safer hands.

The profit margin

The profit margin of the company indicates how much of a profit the company made. This will be calculated by taking into account the total revenue of the company, the operating costs faced by the company and so on. As long as all the costs that a company incurs are lower than the revenue of the company, it can be said that the company is turning a profit. Since a minimal profit is not enough, you need to look for a company with high-profit margins. This show that the company is performing well. Thus, you can be sure that your investment is in a safer place.

The return on equity

This represents the return that you, as the actual shareholder, will get. This is one of the best indicators of value for the shareholder. This return on equity value is dependent on the performance of the business. The total earnings of the company will also have an impact on the value of the ROE (Return On Equity). ROE is generally represented as a percentage. Generally, the higher the ROE, the better the value for investors.

Conclusion

You can invest in just about any company you choose but if you consider the factors given here, you would be able to make a potentially better investment. These factors help identify a safer bet when it comes to the highly unpredictable market. It would be best to look at the facts while investing instead of following a gut feeling or what other people are doing.

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