Open a DBS Bank Account Now
In our previous article, we’ve written about how is buying stocks directly is different from investing in equity mutual funds.
Most people will find it challenging to find the right stock to buy at the right time. However, whatever be the market condition, there may be great value to be found in buying stocks if you do your homework.
Markets are constantly changing, with ebbs and flows, good and bad times. So it’s a useful skill to be able to identify stocks that might be worth investing in, in spite of the current market conditions.
But, where should you start?
That’s a fairly basic rule to follow and you would think that any investor would have the common sense to stay away from companies that have a hard-to-comprehend business model. But it is very easy to get carried away. The “herd mentality” can cloud your judgment and lead you to put your money into a company that operates in an area about which you have no idea.
"Know what you own, and know why you own it" - US investment guru Peter Lynch.
Learn what the company does, understand its business, its operations and its financials before you take the plunge. The next step is equally important: Always review your investments. What is a good investment today may not remain the same a few months down the road.
Collecting data from various sources to make an investment decision can be very cumbersome. Many investors prefer to use tools like a stock screener . This tool allows you to select the industry that you want to target and analyse various companies based on pre-decided criteria.
It is possible to filter search results on the basis of:
Many investors will base their buying decisions on fundamental factors like revenue growth, profitability, return on equity, and the other data that affects a company’s performance. But there is another method that you can use to decide whether you should acquire a share at a particular price.
Technical analysis studies statistics and data related to market activity, so it pays to keep technical indicators in mind before you invest.
Here are 6 useful ways to identify an undervalued stock worth investing in.
Why is that?A company’s share price can fall for many reasons, including the release of quarterly financial results that fail to meet market expectations. However, there are times when the shares fall by more than is justified. In a situation like this, once you have ascertained that the company’s fundamentals are still intact, then you may have identified an undervalued stock.
This method of identifying an undervalued stock could be particularly useful for sectors, like commodities, which are cyclical in nature and susceptible to changes in the business cycle. That means the business tends to outperform the market when the economy is in expansion, but performs poorly during economic contraction.
If you are a long-term investor, a sector that is out of favour in the business cycle may be a good place to look for undervalued stocks.
It tells you the number of times that the market price of a stock is higher than its earnings per share, or how much an investor is willing to pay for ₹1 of the company’s earnings. A higher ratio might mean it would take a long period for an investor to recover their capital investment.
A low P/E ratio could signal a potential buying opportunity. But remember that this is only one of the factors that you must consider. A depressed price to earnings ratio could also mean that the market has advance information about the company’s poor performance.
When the P/B ratio is less than 1, it signifies that investors believe that the firm is not able to utilise its assets profitably. It could also mean that you have spotted a buying opportunity.
A firm with a low price to book ratio deserves your attention. If it meets other investment criteria, you could have spotted a stock that will provide high returns in the months and years ahead.
This financial ratio tells you how a company’s dividend payout compares with its market price. A high ratio may be a sign that the firm is undervalued.But it is wise to proceed with caution. Are the profits sufficient to sustain the generous level of dividends? It may also be the case that the company is unable to deploy its surplus funds effectively and is paying higher dividends because of this reason.
Disclaimers and Important Notices
This article is meant for information only and should not be relied upon as financial advice. Before making any decision to buy, sell or hold any investment or insurance product, you should seek advice from a financial adviser regarding its suitability.
DBS Bank offers Mutual Funds that are instant, paperless, signatureless – even transaction fee-less! What’s more? You get to choose from 250+ Mutual Funds across 15 top-performing asset management companies. So why wait? Login to digibank (app or internet banking) and start investing in a flash with instant Mutual Funds on DBS Bank.
Read up more on Mutual Funds here
Mutual Fund investments are subject to market risks, read all scheme related documents carefully before investing.
