How to pick good stocks and trade or invest in that. (2024)

Everything I learnt was during COVID period, I thank it sometimes and sometimes don’t. Till April 2020 I had the same perception that stocks was gambling and the whole capital or financial markets are kind of bogus, until recently from May 2020 when I started reading books about how to trade and invest in financial markets. One of the best books I came across is “The intelligent investor” by Benjamin Graham for investing and “Candlestick pattern” by Steve Nison which gives a detailed account about trading using candlesticks.

Note: I’ve become an avid investment books reader since then and read a lot of books on investment and trading, so I advise not to generally stick to the books I’ve mentioned above and start trading or investing.

Trading is of 3 types i.e, Intraday trading where traders make money on a day to day basis. Swing trade is a type of trading where traders hold certain instruments and sell it after a week or so. Position trading is another kind where traders buy some financial securities or instruments and sell it of after months together of holding.

So which one is lucrative out of all these? well, the answer is intraday trading, but if it is not done right there are chances of losing the entire capital of that trade.

On what basis trading is done? Well there are certain factors people use for trading and some of them are candlestick analysis, volume per day, technical indicators like Bollinger bands, RSI(relative strength index), Moving averages, MACD(moving average convergence and divergence), Support and resistance. But the main analysis is the candlesticks which will come handy for every trader and the indicators are sometimes lagging.

The main aspects to be kept in mind while trading as far as I’ve learnt is:

1. shouldn’t be carried away by greed.
2. looking out for support and resistance or best calculating it using the formula (I am not going in detail about formulae).
3. Candlestick patterns are the most pivotal and powerful weapon while trading, as a trader, must look out for false breakouts and another kind of mess he can land up in if one is not well versed in how to analyse the candlestick patterns.

When it comes to investing I would like to call it as an art, why because in capital markets anything adverse can happen, I repeat anything no one can predict it. But, while investing there are key things to be remembered and those are

1. Things depend on the condition of the economy of the country, developments and the company, the company because one has to gauge the company whether will it or does it have the ability to scale up in future.
2. Risk Management: This is the factor one has to and will learn as time pass by
3. Don’t put everything in one basket: While investing one has to note that he/she shouldn’t invest all their capital on a single security, diversifying it into different sectors is the thing a risk averter will do.
4. Price isn’t the factor to consider or value a company.

“price is what you pay, value is what you get”

The famous wall street saying was coined by the world-famous value investor Warren Buffet. Now why the above quote? Because, lot of people including me in the beginning I used to value a company based on its price of the stock in the markets, but one shouldn’t do that mistake.

Now coming to what are the aspects to pick up good stocks?

well, the many numbers of aspects while picking some stocks and I will share some of them I know.

1. Debt to equity ratio: Well this indicates how well the company is able to manage its assets using shareholders equity and how it’s managing its finance using debt and their own company funds. The best D/E ratio is below 1.5. But that all depends on the sector of the company one is investing in.
2. Current ratio: This ratio indicates how well the company is able to meet its short term obligations and liabilities on a short term basis. Here the investor should question himself, if the company isn’t able to meet its short term deadlines how will it be able to manage it in the long term?
3. Trade receivables: While assessing the balance sheet there shouldn’t be a sudden increase in the trade receivables, because the company is lending some of its products or services to its clients or customers on a loan and that isn’t good indicator about gaining decent revenue.
4. NPA: this is called Non-performing assets and mainly looked while assessing stocks of financial services or banking sector. This indicates how well the bank is able to recover its loan lent along with principal and interest. If at all there is high defaulting in the loan forwarded to its customers then it isn’t a good investment.
5. P/E ratio and P/B ratio: This is a price to earnings ratio and Price to book ratio. These are the ratios generally compare with industry or the company’s sector and assessed. sometimes lesser than the industry standard the better, and sometimes not. The investor should be able to identify it.
6. Business model: The company shouldn’t change its business model and involve itself in non-core business apart from its core business. If at all it changes one should be able to notice whether it has a competitive advantage or not. Along with all these the investor while assessing the annual reports should notice whether the company has met its previous resolution or not, or is it just the saying of the company? The investor should be able to notice all these.
7. Earnings and dividends: The company should be consistent enough to pay its shareholders dividends and should not cut the dividends, its should either be the same or should keep burgeoning year on year.

With all these factors considered the investor should be intelligent enough of what price he is paying? As Benjamin Graham tells

“A great company is not a great investment if you pay too much for the stock”.

well, there goes another saying for this by Vijay Kedia one of the profound Indian investors

“Rome wasn’t built in a day, but Hiroshima was destroyed in a day.”

If trading is done right it’s will be lucrative else one is definitely going to be on streets, I repeat definitely. coming to investing its a game of risk management and isn’t associated with much stress as trading. As far as my view goes both are better instead of sticking to retirement plans hosted by government and sticking to it. If investing or trading is done properly one can retire at the age of 40 itself. What’s more, is needed for a person in their life?