How to choose your first stock?

Everyone has probably heard about the stock market in their life at least once. But afraid to enter into it as the bad image of stock market which shown to us. In movies and also our parent use to advise us to stay away from this market as they think this is a gambling platform where everyone loose their capital. But we all know that it's not like what we see in movies and heard from the people. Still, some people show courage and enter into the market ignoring the bad things about it in the hope that it will make them rich one day and remove the middle-class category tag from them. But the first thing which comes to every beginner's mind is that how to choose my first stock? Most of the beginners when entering into the market have not much knowledge to analyze a stock properly. A lot of question occurs in their mind like what is PE ratio, PB ratio, ROE, and many more questions.

I still remember when I bought my first stock I use to track its price movement all over the day until the market closes. I use to see every next day the return which I get and believe me a little dip in that stock price directly rise my heartbeats. You can say the price of the stock was inversely proportional to my heartbeats.

If you don't know how the stock market works. I suggest you read this article first.

So besides my story, I am gonna tell you some tips on how to choose your first stock.

How to choose your first stock - 7 tips

You are a beginner so you don't know how to analyze stocks on the parameters of PE ratio, PB ratio, how to read the balance sheets, don't know anything about chart movement and technical analysis. Then, these simple tips can help you to find good fundamental strong stocks.

1. Your own observation

Start observing your surroundings which products are leading in the market which products you use and trust. Find out the product belongs to which company. For example, TATA salt dominating the salt industry for many decades many companies try to enter the salt market but no one can able to dominate TATA salt. Another example is Colgate all of you know in India when we go to retailers to buy toothpaste we use to ask them Colgate instead of toothpaste so see the domination of Colgate is still at the top. Many toothpaste companies came into the market like closeup, pepsodent, Dant Kanti, and many more but no one can able to dominate Colgate. So, clearly, Colgate and TATA salt able to keep our trust in them for decades. And you can see the returns profile of Colgate it is always going up and up even in the covid-19 pandemic when the market has fallen around 30% it is not fell that much. So it is a simple but very effective tip to find good stocks.

Read here ; Why stock market is the best investment ever?

2. Customer satisfaction is a must

As I told you in the first tip to observe your surroundings find out the good products. You should also find out that the company of which you gonna buy the shares, its product is satisfying the customers or not. Customer satisfaction is an important factor in a company's profit and revenue growth. I gave you the examples of Tata salt and Colgate in the first tip. These products are used to satisfy their customers for many decades. If their customer even wants to try something new they use to come back again because the new products which are coming in the market are not able to satisfy the customers as TATA salt and Colgate doing.

3. Profit and sales growth

You found the product and also found out that the products are satisfying the customers or not. Let say you found a company which has a variety of good products and also has customer satisfaction and company revenue is also growing up with the time but the profit remains constant. Now ask yourself that you are ready to invest in the company which is growing their revenue but still not able to increase their profit. See anyone can sell their products at a cheap price but the company which is growing their profit with their revenue will have a strong potential to compound your money. So, with customer satisfaction, it is also important that the revenue and profit of the company should also be increase with time.

Read here; How to start investing in the stock market?

4. Is the company have debt

The company is doing well on all parameters growing revenue and profit continuously and has good customer satisfaction too but has a huge debt. Should you invest in that company. Because of the debt, the assets of the company will maybe decrease from time to time. And sometimes when a company cannot able to pay the borrowings the promoters have to sell their holdings which results fall in the stock price. Let's take the example of Ruchi soya which is the market leader in the industry but the company has too much debt from banks and when the company is not able to give back the borrowings the banks filed the case against the company and you all know what happened after that. So, you should go for one which has almost negligible debt or enough less that they won't have to sell their assets.

Read here; How PE can be used to analyze a stock?

5. Management 

Now you found a debt-free company with good customer satisfaction and profit and the growth of the company is also increasing with time. But what if the management of the company is not good or doing something wrong. Let's take an example of what happened in Yes bank which was the favorite stock of all the retail investors. The founder of the company Rana Kapoor and their management use to give the loans to those companies also which had not potential to give the loan back. And when those companies started defaulting the loan. Yes bank management tries to hide their NPA's from RBI but for how much time. When the NPA's went out of the limit then all the things started to come out and the rest is history. So, bad management can bankrupt a good fundamental company. Before buying a stock spend some time analyzing the management also.

If you are a beginner to the stock market or want to enter into the stock market but don't have any knowledge of how to do analysis and how to pick stocks then you can go for the book "How to avoid losses and earn consistently into the stock market" written by Prasenjit Paul. I will suggest this book if you have made the decision of investing in the stock market then you should start from this book.

   

6. Analyse the company's business

Spend some time analyzing the business of the company. Ask yourself that the company of which shares you are thinking to buy, demand for the product of that company will increase or decrease in the future. If you think that the demand for the products may be decreased in the future then you should not go to that company. Let me give you an example it's around 2% of India's population is investing in mutual funds and it will definitely increase with time as the economy grows and more people start thinking about investing. So, the revenue and profit of mutual funds can increase in the future in an unexpected way. So analyze that the demand for that company's products will gonna increase or decrease.

Read here; Top 5 stock market investors in India?

7. Shareholding pattern

You found out the company which has passed from all the parameters. Now just think that the promoters of the company are decreasing their holding from the company which directly means that they don't have trust in their own company. Now ask yourself will you invest in the company of which promoters are continuously decreasing their holdings. So, decreasing the promoter holding is not a sign of a good company, go for that one of which promoters are trying to increase or at least stable at their holdings.

Conclusion

You can find a good fundamental stock on the basis of the above parameters. If you're a beginner you don't have that much knowledge but want to start to learn then you can use these parameters. Now I think you may have found some tips for your question of how to choose your first stock!