Sources to pick stocks for valuation.

The most practical issue for a beginner is to find out potential companies that are worth investigating. There are more than 7000 listed companies in the Indian stock exchange and it’s definitely a daunting task.

Although, later, you may be a totally independent stock picker- free of all biased views- in the initial stages, one has to make some smart moves to find sources from where he can pick stocks for analysis. That’s my opinion.

SOURCES TO PICK STOCKS.

  • 1.Indices:

One method to find companies is to locate them from the indices. These include –

  • General indices like Sensex,  and nifty,
  • Capitalization wise indices such as mid cap index and small cap index,
  • Sector wise indices like Bankex , auto, reality etc..

A stock is included in the index only if it meets many quality criteria set by the stock exchange. For example, if you are trying to spot a blue chip stock, better select a company that has been included in the index.  This gives you a ‘reasonable assurance’ that the company is worth in a particular sector and that it is a company that complies with all the legal requirement set by the SEBI and the stock exchange.

This is a smart way to start. It’s not fool proof-for example satyam computers was a Sensex stock at the time when the scam broke out. Those can be considered as  exceptional cases.

  • 2. 52 week lows:

A second source is to locate those companies from the 52 week lows list. But, here you have to be a little more careful since the list is prepared from all the companies listed and traded, regardless of its market capitalization and category. Unlike index stocks, quality aspect of the stocks selected from 52 week lows need further validation.

  • 3. Stocks below 200 day DMA

This is another source to hunt for good stocks. The 200 day moving average is supposed to be a major support point for stocks technically. Financial websites provide data about stocks that break this major support. Needless to say, you must check why the stock is in a down trend.

  • 4. Analyst’s comments

You can hear about stock experts saying their opinion in various Tv shows, financial magazines and websites. They are experts in their own field and their comments and views are not something to be ignored totally. This doesn’t mean going after each and every piece of information from all sources. Try to follow one or two reputed experts. They might just give you some hints to start off.

  • 5. Spurt in volumes traded.

Did you notice a sudden increase in volumes traded in a particular stock? One thing is sure- there is something going around that stock. Investigate the reasons for increase in investors interest – and you could spot a winner there.

  • 6. 52 week highs

Stock that break their previous 52 week high is another category.   Since the list is prepared from all the companies listed and traded, regardless of its market capitalization and category, you have exercise extra caution on such shares. Sudden rise in prices of sleepers could be due to smart speculation by some smart fellows out there.Yet, those companies are worth looking at.

  • 7. Lifetime highs

That’s the last specific category I would like to mention. Stocks that break lifetime highs should be always noted. A company’s share would keep hitting life time highs as it continues to grow and post excellent earnings year after year.

  • 8. Own research:

The above mentioned sources are short cuts for people who need some sort of a kick-start. It has its limitations too. But, if you are going to become a full time investor, then the prudent way is to go out and look for ideas. And, that means, you need to do your own research and keep up with the stock market and current trends. Reading business papers and magazines will help you decide.

SUMMARY OF PERFORMANCE.

After short listing the companies, the next step would be to collect the summary of financial performance of the company for the last 5 or 10 years. That’s not a big job since the datas are available in finance websites like Google finance in summarized form. 2 hours of browsing through any financial web site would get you the historical information.

The art of investment is to narrow your search down to a few companies that you can study and follow, and, based on the information you discover about them, you can then make better informed investment decisions

Three main obstacles.

I consider it appropriate to advise the investor at this stage itself, that there are three main obstacles in the way of successful analysis

  • Inadequate and/or incorrect financial data pertaining to the stock under study. – I don’t think I need to explain further on that.  If invalid data is used, the results will also be invalid!!
  • Future uncertainties: Uncertainty is a fact. It is not quantifiable like risk.
  • Irrational stock market behavior: The market is ultimately ruled by the aggregate psychology of market participants, and as a result, bubbles will form or the market will crash, bringing prices to levels that extremely deviate from what fundamental analysis would predict. Nobody can time or predict all these.

CONCLUSION.

With these realities in mind, we proceed further; the next step would be to collect quantitative data about the company. This includes a 10 year history scan and available information about the company’s future plans. More about that in our next lessons..

You may like these posts:

  1. What is a stock index?
  2. Should you invest or trade in stocks?
  3. Do stock indices tell the right story?

3 Responses to “Sources to pick stocks for valuation.”

Ron

January 26, 2013 at 11:57 pm

Hi Victor,
It is a great work by you…..i appreciate it…..i have a small doubt in this section………..where to get the data like 200 DMA etc…….tried finding it, but in vain……if u cud pls tell it, it wud be of great help

J Victor

January 27, 2013 at 1:43 pm

http://www.moneycontrol.com/technicals/breakout/negative/avg30/index.html
in the above link you’ll get both the positive and negative break outs from DMAs.

Ron

January 28, 2013 at 7:16 am

Thanks a lot………You are absolutely awesum dude………keep up the work…….just a small suggestion, I think you have stopped posting blogs in the Beginner’s section after Future and Options…….If you would just continue with it, it wud be of immense help to Begineer’s like me, who follow you very regularly…..thnx a ton again…..god bless u!!

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