How to Determine The Best Stocks to Buy?

Best shares to buy’ constantly remains as one of the top searches. Investing in the share market can be an overwhelming experience especially if you are a beginner. Buying a share is influenced by various factors such as share price, company history, and more. It requires you to do proper research and select the stock that gives your maximum return. Let us read more to determine which stock is best to buy. Keep reading!

Which share is good to buy - A definitive guide

1. Determine your financial goals

Your financial goals play a vital role when choosing companies that you want to invest in. Few investors are focused on increasing their portfolio over a long period while others are interested in a long-term approach. Investors with a long-term approach are focused on capital preservation and hold their investment for a long period.

2. Determine your willingness to take on risk

As a first-time investor or even an experienced investor, you must analyze and understand your risk capacity. There are various investment options available with different risk and return profiles. It is important to choose an investment option based on your risk capacity and requirements.

3. Buy stocks only if you know the company

It is important to understand the company to invest in the shares. You must do proper research and understand how the company has been performing over the years and the important changes that it has undergone. This will give you a good idea of whether to sell, hold, or buy a share related to that company.

4. Learn about financial ratios

You must have a deep understanding of the financial terms that are useful for investing. To understand the efficiency of the company, you must check the profit-and-loss statement, balance sheet, and cash flow statement of the company. This will give you an idea about historical growth, profitability, financial ratios, and financial stability. Also, you must know about ratios such as the return on equity (ROE), earnings per share (EPS), the working capital ratio, price-to-earnings (P/E), the quick ratio, and the debt-to-equity ratio. These ratios will further help you in comparison with other companies in the same market or industry.

5. Be cautious of value traps

Investors, especially beginners, focus on the company's price book, price-earnings, price-cash flow and price-sales ratios. However, making decisions only based on these factors may not be the correct one as there are chances that the company might be experiencing financial distress. While investing, you must also consider factors like competitive advantages, potential catalysts, and management effectiveness to avoid any value traps.

6. Steer clear of chasing high yields

You can check the payout ratio to identify yield traps. Yield traps can be calculated by dividing the dividend payout rate by earnings. If it is above 100%, it indicates that the company may not be profitable enough to pay its dividend solely with retained earnings. Investors focused on dividends invest in stocks based on higher dividend yield. You can calculate dividends by dividing annual dividends by share prices. However, choosing a stock based on high dividend yields may result in holdings of unprofitable and stagnant companies. A plummeting yield can appear high momentarily as a stock's price begins to decline.

7. Assess if a company has a competitive edge

A qualitative approach is appropriate to assess a company’s moat or advantage. A good indication of the company’s advantages includes the size of the organization, cost leadership, switching costs, patents, license, and brand recognition (intangibles). A company remains dominant in an industry for decades if it is operating in a vast economic moat.  If all other factors are equal, this indicates, high margins and consistent cash flow. This increases the company’s value over the period.

Conclusion
Investing in the best shares to buy requires thorough research especially if are a beginner. You must understand your investment requirements such as duration, risk, track record of the company, and more. It is advised to invest long-term, take advantage of dividends, and find stocks with successful track records. You must avoid risky and aggressive trading tactics to minimize risk.