A beginner should understand that stock selection is the function of “what you expect from the stock” and the “time horizon” of your investment. If you expect steady dividends from your portfolio, then your stocks selection will be completely different from someone who is willing to take risky bets by investing in small companies. If you are new to investing, then first find out which type of stocks suits you based on your expectations, from the below content.
Blue Chip Stocks
Blue chips stocks are the companies that are doing their core business for many decades and often they are the market leader in their category. They are well established and well-capitalized, which means these companies can easily whether any type of critical business environment. By nature, they are a safe business but sometimes they don’t grow very fast because they are somewhat mature businesses.
Selection Criteria for Blue Chip
- Uninterrupted dividends for the last 20 years
- Increasing Dividends for every 3 years
- Increasing Earning Per Share by more than 10% for every 3 years.
- The stock should be owned by at least 5 DII.
- The stock should have more than 50 lakhs shares outstanding
Who can invest in Blue Chips?
Blue Chip stocks are very well suited for people who don’t like to have volatile share price performance in their portfolios. Some of the acclaimed Blue chips in Nifty50 are TCS, HDFC Bank, Infosys. Investors should have a time horizon of at least 3-5 years while investing in these companies.
Value Stocks
Value investing is the idea that you can find undervalued stocks that look like attractive investments. You can do that by using financial analysis. When you analyze a business and its stock performance, you can find and buy stocks that are priced well below their true intrinsic value. Value investing is the mantra of many famous investors, such as Warren Buffett. Value stocks are generally out of favor stocks, due to their poor past performance.
Criteria to find value stocks
- Low Price to Earnings or low Price to Book Ratio
- Debt to Equity Ratio less than 1
- Free cash flow should not be decreasing
- Trading below Net Current asset value.
Who can invest in Value stocks?
Buying value stocks is not so fancy. It is often boring and dull. If you have lot of patience and willing to wait till the market recognizes the value stock, you can go for buying value stocks. Investor should have time horizon of more than 5 years while investing in these companies
Dividend stocks
Some people put their money into markets to see stock prices rise. Others care more about earning dividends from their investments. If you want your stocks to pay you, dividend investing is the name of the game. Dividends are a portion of a company’s profit paid to shareholders. Companies often pay Dividends on a quarterly basis or annual basis. Look for a trend of steady dividends (, dividend growth) over time. That usually signals a financially healthy company with good long-term prospects. If the dividends that you receive from companies exceed your annual expenses, then you are financially free.
Criteria to find dividend Stocks
- Dividend Yield greater than 5%
- Dividend increasing every year
- Uninterrupted dividend-paying history.
- Dividend payout normally greater than 30%
Who can invest dividend stock?
If you are only interested in receiving regular passive income but not interested in growth of the company, then you should look for dividend investing. Investor should have time horizon of more than 5-10 years in dividend investing.
Growth stocks
If you are someone who has come into the market just to grow your money very fast then, growth investing is for you. Growth companies are those who grow their revenue, profit, and market share in a very short period of time. And the share price of the company also moves higher very fast. These companies generally don’t distribute dividends and sometimes they might be making losses. Their only aim is to gain market share from their competitor. These stocks generally trade at a premium valuation. You should have above average risk appetite to invest in this company. Growth stocks have earnings that grow at a faster rate than the market average. Smaller companies and newer companies are riskier for investors. But they offer strong opportunities for growth.
Criteria to find growth stocks
- Revenue growth greater than industry growth for last 5 years
- Profit growth greater than industry growth for last 5 years
- Should not dilute their equity
- Debt to equity less than 1.5
Who can invest in Growth stocks?
Growth stocks are suitable for people who want to grow their wealth fast but downside is also very high. If the growth of the company stops then the share price may fall 30-40% in quick time. You should have clear cut understanding about the business, industry and about their growth prospect. You should have time horizon of 2-3 years while investing in growth stocks.
FAQ
I don’t have time to analyze stocks, what should I do?
The best option is to invest in an index fund or index ETF. You don’t need to track any company performance and in long run, you will be able to earn a decent return that will be above inflation.
Can I invest through Mutual funds?
Investing through a mutual fund is also a good idea but selecting which mutual fund to invest is very difficult. There are 100’s of schemes and investors often get confused in selecting the best,
How do you know which stocks to buy?
To know what stocks to buy, you need to assess your risk tolerance, financial situation, and investment timeline. These factors can help you target types of investments, set diversification goals, and determine other details for your portfolio
When is the best time to buy stocks?
Timing the market is incredibly difficult, Many prefer systematic buying strategies, such as “SIP,” that avoid trying to time the market.