Parameters To Consider For Selecting Stocks 🤔

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Often selecting quality stocks from the ones listed in the indices becomes a tricky operation as there are lot of them to choose from, Especially for one who is starting out to invest in stocks. Many a times people used to go by the trend or momentum existing in the market for a particular stock in general. The issue while following this approach of going by the momentum is that many a times this is short lived and some times these may not be a reflection of the corresponding business fundamentals.

There are different kinds of stocks available in the stock market which can be traded using different strategies, For example some of the stocks depict huge fluctuations in prices during trading sessions, Such stocks are suitable for day trading or a.k.a Intra-day trading. On the other hand there are some stocks which does not display such volatility and  exhibit growth over long term.

Here we are going to discuss about some of the parameters that can be considered before selecting a stock. If you are someone who is starting out to invest in stocks this would be helpful.

Parameters to Consider

  • Beta : Beta in simple terms refers the volatility of the asset in our case its stock value. For example if value of Stock A on start of a trading session is say 100. During the day trading session its price fluctuates between 85 to 125. In the case of Stock B, its price fluctuates between 90 to 105 given the same starting price. In this scenario Stock A is said to be more volatile than Stock B. In other words Stock A would have higher Beta compared to Stock B. In general we measure the Beta against the market index which would give us an idea of the volatility of the particular stock compared to its index.
  • Alpha : Alpha in simple terms refers to the outperformance of the stock compared to its index. We will take an example of two stocks, Stock A yields returns 25% more compared to its Benchmark or index on the other hand Stock B yields 10% more than its Benchmark or index. In this case Stock A is having a higher Alpha compared to Stock B. If a particular stock yields a return less than the index then its alpha would be negative.

  • NPM : NPM refers to Net Profit Margin, which in simple terms refers to the net profit generated by the business from the total Revenue. 
        • NPM = Net Profit After Taxes / Total Revenue.

  • PE Ratio : PE Ratio in simple terms gives an indication of whether a particular stock is overvalued or undervalued. Since its a ratio of Price of the share to the Earnings per share. Higher PE Ratio indicates that the stock is overvalued when compared to another stock in the same sector which has a lower PE Ratio. Here its important to remember that we have to compare stocks belonging to the same sector having a similar revenue and market cap.
 These parameters gives a fair indication of the performance and stability of a stock. Its important to note at this point that these parameters are backward looking, in the sense that it has been calculated from the past stock prices. It does not guarantee that these parameters remain the same in the future.


Also while comparing the stocks we have to compare Apples to Apples which means that we have to compare between the stocks belonging to the same sector and having a similar Market cap, For instance we would not be able to draw significant conclusions if we try to compare between a large cap stock and a small cap stock even though they belong to the same sector.

One of the sites which provide stock analysis and filtration is tickertape

Conclusion


Parameters that we discussed so far are some of the important ones out of many. Its up to the individual to analyze these parameters and take an informed decision to purchase the stock. For some one who is starting out to invest in the stocks it would be better to choose stock with a Beta value less than 1 and Alpha greater than 1 as these tend to be more stable stocks with less volatility.

Happy Investing 😊 


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