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5 Simple Ways To Generate Stock Investment Ideas

 

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Idea generation is both art and science. When it comes to investing, quantitative methods based on criteria such as PE Ratio, Sales growth, or Return on Equity can give us various results for consideration. On the surface, the companies with the lowest ratios will be the cheapest publicly traded companies at the moment. However, successful investing is far beyond picking the quantitatively screened cheapest companies.
Quantitative methods suffer from many limitations. for example a one-time item, such as a non-recurring gain on the sale of subsidiary, can inflate reported income, making a company appear cheaper on the basis of P/E than it would be if the one-time gain was excluded. In the absence of such one-time items, cyclical businesses will report the higher earnings at the top of a cycle and lower earnings during the bottom of cycle.
 Most of the times cheap companies are cheap for a reason, it can be high debt, corporate governance issues, regulatory issues or anything. 
Due to time constraints, its not possible for retail investors to analyze every single company out there. This time limitations force us to prioritize. Let's look at five simple ways of generating stock investment ideas-


1) Buying what you know-  Start with an industry or a company that's familiar to you. It takes lots of research and study to finalize any investment idea, focusing on companies that you have knowledge of will make the exercise interesting and engaging. Suppose, if you have been working in a IT company, you could start looking at IT companies, or if you have been working in FMCG companies ... start by looking at FMCG companies. Try studying the top players of the industry and then gradually move to mid caps and small caps. You can apply both fundamental and technical analysis to select stocks for investment.


While its important to invest in what you know, but its not recommended to put all your eggs in one basket. If things don't turn out favorable as expected  for the industry that you are invested in, you could end of loosing your capital. So, always diversify your capital among stocks and sectors to minimize risk.



  • Invest in multiple sectors. If you are heavily focused in technology, consider investing in real estate, consumer good or other industries as well.
  • Avoid putting all of your investable funds into the stock market. Consider bonds, currencies and commodities as well.
  • Have a portfolio of around 15-20 different stocks that aren't related. Make sure you can keep track ofl your stocks easily while still providing a wide array of earning opportunity.
  • Buying stock means buying part-ownership of a company, check if you are willing to the entire company (assuming you had the money)
  • Calculate how long it would take to pay off your initial investment from the profits assuming you bought the entire company. Use these results to determine if it is worthwhile to buy the shares of the company.
  • Always remember, profits can fluctuate wildly with markets change. New technologies, government regulations or competition can make company's products less valuable or even useless.


2) Use online screeners-  You can easily screen stocks based on different financial parameters using websites like http://screener.in. Simply enter your preferred financial parameters and narrow down to a list of stocks satisfying those parameters. For example you can get a list of stocks satisfying these parameters, Debt to Equity < 1, Price to earnings <12, price to Book value < 1.5 roce> 20 etc. etc. You can have as many screening criteria as you like and narrow down to stocks that meet those criteria. Once you have narrowed them down you can perform more in depth fundamental or technical analysis (ideally both) to select stocks for investment. Since everyone like to own only those stocks which are financially sound, it is a good strategy to reject financially unsound stocks using tools like screener. 


3) Read Read Read-   Read annual reports of companies. Check the Investor Relations section of company's website, read financial newspapers, magazines and reports. Instead of focusing on recent results focus on finding a company with consistent history of profitability and financial health, not just one good quarter.

Look for revenue growth and profit growth. In long run, stock price rise with growth in revenue and profitability of the company.

The share price of a company with high debt is likely to be more volatile because more of the company's income has to go to interest and debt payments. Compare a company to its inudstry peers to see if it's borrowing an unusual amount of money for its industry and size.

Find companies with good dividend yield. Regular dividends are a sign of a company in good financial health. If a company pays a dividend, look at the history of their payments. Are they increasing dividend or not?


4) Exchange announcements -  Exchange announcements can be good source of generating stock ideas. Companies are required to announce specific events such as corporate acquisitions, quarterly results or changes in stake ownership of its promoters/insiders where the last example is my common trigger for finding attractive buys. Its recommended to keep an open eye to companies which announce open market purchases by its insiders. These insiders can be either its own management directors or investment funds who have taken a huge stake in the company. Again, the idea behind this is  to ride on the information that these people possessed. In other words, when insiders made an open market purchase/sale, they are actually sending a signal to the public that they are confident/skeptical about the company’s performance and hence, have invested their own money into it. But this is not flawless as well. It is by no means that an investor can safely commit his capital to a stock simply because the management have invested in it as well. As Warren Buffett had mentioned before, management will always think that their stock is cheap. However, by keeping an eye to the above, chances are likely that you can stumbled upon an attractive stock.

5) Blogs & websites
Forums, blogs and websites can also be a good source of generating stock investment idea. The financial market is a place of hundreds and thousands of investors and each one of them is constantly searching for their next attractive investment opportunity. Some of them keep it to themselves while others may choose to share it on their blog, website or forums. If you keep your eyes opened attentively to these website, there might be a chance of finding a good buy. Of course, this method should be used only to screen out investment opportunities for further analysis and one shouldn't be buying stocks only because someone else is positive on it.

 You'll need to do some research and calculations to determine the value of a company. Maruti Suzuki at Rs. 8000 per share can be far more valuable than any ABC Ltd. trading at 50 paise.


  • Buying stock means buying part-ownership in a company, determine if it would make financial sense to buy the entire company (assuming you had the money).
  • Calculate how much time it would take to pay off your investment from profits if you bought the entire company. Use these results to determine if it is worthwhile to invest in shares.
  • Keep in mind that profits can fluctuate wildly with markets changes. New technology, changes in regulatory environment, court orders etc. can make company's products less valuable or even useless.


In Conclusion 

We have reviewed 5 simple ways that investors can use to generate investing ideas. Regardless of which approach you choose, make sure your approach makes sense to you and that you are persistent in your efforts. The best investors, even Warren Buffett, are constantly looking for new investing ideas. If you are diligent and consistent in your approach, you will be sure to find some quality investment opportunities. After all, developing the ability to pinpoint quality investment opportunities is the first step to becoming a successful investor. 



Happy Investing

Multiplier Wealth

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  1. As usual, artcal is very much suportive to increase knowledge of market.

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