When you have already decided to venture into the stock market, the main objective for an investor is to select the right stock to play with. Well, there is always ambiguity when entering into a new venture. The financial market is a huge market and consists of numerous options for consideration. But a novice might get confused while making the right decision among the various investment vehicles available. This, sometimes, results in the investors making unwise investments and in turn, they subsequently turn away from the stock market altogether.
Let us look at the different types of stocks one can choose from.
Types of Stocks
The stocks can be mainly divided into:
- Common Stocks: As the name suggests, this type of stocks are quite common. It is the basic stock a corporation issues. Buying a common stock will give you an advantage of owning the equity in the company. It has varied dividends/ or returns. Not only this, as one of the shareholders in the company, you have your say in voting for the board members as well.
- Preferred Stocks: These stocks are usually a hybrid between Common stock and bond. These stocks represent some degree of ownership in a company but usually don’t come with the same voting rights. Each share of preferred stock is normally paid a guaranteed dividend which receives first priority over common stock holders in the event of liquidation. Preferred shareholders always receive their dividends first and, in the event the company goes bankrupt, preferred shareholders are paid off before the common stockholders.
The Preferred Stocks are further sub-divided into 4 categories:
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- Cumulative Preferred Stocks: This is more of a savings stock. In the case of cumulative stocks, if for some reason the dividends cannot be paid out one year, it is added to the dividends the following year and paid out in one larger amount.
- Non-cumulative Preferred Stocks: In this case, the dividends skipped one year are not added to the following years’ dividends.
- Callable/ Participating Preferred Stocks: These shares may receive higher than normal dividend payments if the company turns a larger than expected profit.
- Convertible Preferred Stocks: This type gives you (stockholder) the right to convert your stocks into a fixed number of common stocks irrespective of market price.
Well, I know that after getting equipped with so much information about the stock market, as a starter, you might want to jump into this bandwagon of the stock market and play with it. But wait; first know the criteria for the right selection of stocks and that will certainly enable play a defensive shot as a starter.
Ok, let us talk about the objectives determining the selection of stocks for an investor.
- How to maximize the total return on investment (e.g. appreciation plus any dividends received).
- Selection of a stock that can limit risks.
- How to maintain an appropriate degree of portfolio diversification.
You can also broaden your knowledge through the various newspaper articles, internet shows, and magazines etc. that have the analyst’s views of the stock market. Well, no analyst can be 100% correct all the time, however if there is a consensus among analysts that is a good sign.
Make sure you examine the company closely before investing. Now what is it that you need to look for in a company:
- The income statement
- The balance sheet
- The cash flow statement
The steps in buying a stock involve two steps:
- Analyzing stock: When one watches a game of football or cricket, it is easy to comment on the winning or losing team, but only an analyst can find out the reason behind the failure of the losing team and the strategies applied by the winning team to take a lead in the game. And if you start with a little bit of analysis before finalizing on the plan you want to invest in, it can certainly load you with confidence and allow you a good start.
- Momentum Tracking: It is always important to keep pace with the market momentum and venturing into and shifting between the right stocks which can earn to better profits on a timely basis.
To simplify the selection process, many investors choose stocks based solely on performance. But there are other factors which also need an investor’s attention & these are:
- Portfolio fit – You should focus on companies which enhance your portfolio and also attends to your investment objectives, risk threshold, and time management criteria.
- Investment Management Process – While investing one should concentrate more on the companies which has a track-record of a clear history showcases a disciplined investment process and is more or less successful in delivering the anticipated investing benefits.
- Performance – From the above discussion it is clear that one needs to pay attention to the past performance of the company, the investor wants to delve into. This is to ensure consistent returns with minimal risk.
Evaluating the financial market behavior via analytical skills becomes an integral characteristic for an investor and helps ascertain the market behaviour.
Equity Analysis: A) Fundamental Analysis, and B) Technical Analysis.
Key to Fundamental analysis of stocks
The fundamental information that is analyzed can include company’s financial reports, and non-financial information such as estimates of the growth of demand for products sold by the company, industry comparisons, and economy – wide changes, changes in government policies etc..
Key to Technical analysis of stocks
Technical analysis is solely based on a company’s valuation through its price movement in the market. It delves into the study of supply and demand of the product in the market in order to find the trajectory of its future deviation.
Much said and done about stocks, their types and valuation, it is the investor who is solely responsible for the right choice of their stocks/ plan and earns benefits after thorough consideration.