How to Select Winning Stocks For Investment

Investing in stocks can be extremely rewarding in long term, say 5-20 years time frame. Many people are scarred to invest in stocks due to some painful experience of have lost money in the stock market, or have heard of someone who have lost money in major stock market crash like 1929 in USA or dot com bubble burst that happened in spring of 2000 through 2001.

Breaking the Ice

For people, who are weary of investing in stocks must understand that various asset classes like property, commodities, or equities succumb to factors like temporary economic instability, market-correction, and its own cycle in short term. However, from long term perspective, it would be practical and wise to invest in both property and equities (stocks) in a ratio that you feel comfortable with.

Your Risk Tolerance

Reaping rewards from your investment in stocks comes with inherited risk, that in an event of major market fluctuations, your stocks may go down in value temporarily. Therefore, you must be able to make yourself comfortable and resilient to short term ups and downs of the stock price attributed to countless internal & external factors. If you can not sleep over at night, because your stocks went down by few cents today,

Quick Stock Selection Criteria to Pick up Winning Stocks For Investment

Assuming, that you are going to invest for minimum 5 years, I have devised a simple method of selecting winning stocks.

• Time or Operation : Prospective company must have been in business for at least 20 plus years, and should has shown steady growth in its EPS earning per share.

• Market Capitalization : The market capitalization of the company should be at least around US$1 billion or more. This will ensure that you don't end up investing your hard earned money into some one day startup company, which can close down, and disappear in no time, making you lose our investment.

• Growth : The company's stock price should have gained at least 20% annually over a period of last 10 years. Which means the stock price would have appreciated by at least 200% overall in last 10 years. Also, the stock price growth should have been steady rather than very high ups and downs in its stock price.

• Price to Earning Ratio : The PE (Price to Earning ratio) of the prospective company's stock should not be more than 15-20. Lower the PE ratio, more desirable should be stock provided, it fulfills the other requirements mentioned. If the stock has PE ratio lower than 10, then it is even better, however, extremely low PE ratio like less than 5 may indicate a problem, with the company's past, present, & future prospects. However, PE ratio lower than 5 doesn't mean that the stock is undesirable, it could also mean that major institutional and professional investors may not have noticed the stock yet. In this case, it could be a bargain investment, which may have future potential to return many times than it's current purchase price.

• Dividend : Prospective company should be paying dividend with 100% stability (which means the company has paid dividend without missing a single year). Also there should be a steady increase in the dividend payout every year compared to its last year dividend. This ensures that company is heading in right direction, which again will lower our risk.

• Company Management : Read about the company's past problems in various areas like bugs in its product in past, or a troublesome management, or past attempts of the management to distort company's financial statements, and other crucial data that may have been altered to misguide customers or investors. If the company doesn't have a honest management, avoid investing, in that company at all cost. Enron is a good example of corrupt management. Also, if you are invested in a company and at later stage you become aware that the management was not not honest, you should immediately liquidate your investment at all cost, as the company may be at the verge of going down.

• Avoid New Startups : Keep in mind at all times that you are investing to make money, and not to lose your capital, if you lose the capital, you will lose the growth potential too. Avoid investing in new startup companies IPO (Initial Public Offer), as they may appear lucrative and exciting, but could be a high risk, and our major objective is to find companies with lowest possible risk with solid historical growth, so that we can minimize the chances of loosing the capital.

• Understand Company's Revenue Model : Invest in companies, who's business and revenue model is easy to understand, and you have knowledge and ability to understand, and evaluate its operation. For example professional investor and world's second richest man, Warren Buffett doesn't invest in technology company because, they says that he can't understand technology companies, and its current and future value.

• Concentrate on Few Good Ones : Don't invest in too many companies, as it will dilute the growth of the winning stocks as the loosing stocks will dilute the overall portfolio growth. Say, for a investment up to $100,000 you should invest maximum in 5 stocks, For investment over 100,000 to $1000,000 you should have invest in maximum 10 companies. Also remember that it is best to invest in excellent companies at fair price than to invest in mediocre company at a bargain price.

Happy Invest in Stocks

Keshav Jha