How To Invest For Better Returns: The first step in investing in the stock market is to choose such stocks which are likely to give good returns over a long period of time. It is not right to identify such stocks just on the basis of hearsay or tips from here and there. If you want to get better returns than the market with the least risk, then you have to keep an eye on certain filters or criteria. Let us know, what are those important criteria, by paying attention to which you can choose the right stock.
While choosing a stock for better returns, you should focus on those stocks, which have these four characteristics.
1. Good quality stocks that are currently priced low
The first criterion of a good quality stock is the safety of the investment. That is, a company whose financial position and performance of recent years is good. In terms of investment security, focusing on a company with a market capitalization of at least Rs 500 crore can prove to be a good strategy. Apart from this, the PEG i.e. Price-earnings to Growth ratio of the stock should be less than one. This shows the true valuation of the company’s shares.
2. Good Dividend Paying Stocks
Another criterion for choosing a better stock for investment can be a good dividend. Dividend means that part of the profit that the company distributes to its shareholders. Consistent dividend not only gives direct return on investment to the shareholder, but also reflects the good financial health of the company. Before investing, the company’s record of paying dividend for the last 5 years should be seen. Also, better if the company’s dividend-pay-out ratio is less than 40 percent. Because it shows that after distributing a part of its profit, the company also invests the remaining amount in the expansion of business.
3. Shares that are getting a good discount to the book value
If a stock is meeting both the above criteria, then the third thing to look at is its ‘discount-to-book value’. If the company is looking strong and with a better future in all other respects, yet its shares are getting at a price lower than its book value, then it can get good returns going forward. In such a stock, it must also be seen that its debt-equity ratio is less than 1.5 and the return on net worth has been more than 10 percent in recent years.
4. Stocks with good growth potential and reasonably priced
This can also be an important criterion for selecting the best stock. The question is how to get an idea of good growth potential and reasonable price. If the P/E (Price-to-Earnings Ratio) of a fundamentally strong stock is less than 15, then the price can generally be considered reasonable. Earnings growth of the company should be at least 20 percent in the last 5 years. On YoY basis, the earnings growth of the previous quarter and the trailing earnings growth of the last 12 months should also be at least the same i.e. 20 percent.
A stock that meets all these criteria can prove to give good returns in the coming days with low risk. However, keep in mind that the things mentioned here are not investment tips. These criteria are included in some of the basics to be followed for making better investments. Apart from these, it is also necessary to keep an eye on the news related to the stock, the condition of the industry concerned and the national-international situation affecting the entire economy.