Home » 9 Things to Consider Before Investing in Equity: A Checklist

9 Things to Consider Before Investing in Equity: A Checklist

9 Things to Consider Before Investing in Equity: A Checklist

Are you planning to invest a fresh amount or top up existing investments in equities/stocks? While investing in equity is a great way to grow your wealth and diversify your investment, it is also a complex investment decision to make. Though you may need professional expertise and guidance to better understand the trends, regulations, pros, and cons of such investments, it is prudent to educate and refresh yourself before proceeding.

So, before further ado, we present you a checklist of key things you need to consider before you invest in the equity market:

1. Products and Services of the company:

The ultimate thing that would impact the price and health of stock in the long-term is the core business the company does. The quality of the product/service, the competitiveness, and availability of alternatives drive the profitability and longevity of the business.  Hence, firstly try to understand the top-selling or major products or services of the company before investing in it.

2. Promoters or Owners of the company:

Once you understand the product, the next thing you need to learn about is the promoters and owners of the company. Get to know more about the credentials and background of the board of directors, MD, CEO, and the management team. Also, it is good to learn about the shareholding pattern of the company as it would affect the market capitalization and profit-sharing of the enterprise.

3. The Profitability of the company:

Perhaps, the profitability of a company matters the most while evaluating a company. However, just not the profitability but the consistency of it is vital for your investment decision. Therefore, you need to research about the profits of the company in the last few years, gross profit, operating and net profit. Additionally, learn more about the profit margin at each level of the business and growth rate of the profit and if it has a stagnant or declining trend.

4. The Competitive Advantage:

How is the company you are interested in placed in the market? Does it have a sustainable competitive advantage over its other competitors in the industry? Ensure you learn about the intangible assets, cost advantages, customer switching cost, and network effect of the company and how it stands up against its competitors.

5. Past Performance of the company:

You can know about the historical performance of the company through its previous years’ financials like cash flow statements and income statements. Focus on the sales revenue, EBITDA, free cash flow, operating revenue, and other financial parameters.

6. Company’s balance sheet:

If you want to know about the holistic financial health of the company, then you need to study its balance sheet to know more about its assets, liabilities, shareholders’ equity, intangible assets, receivables, payables, inventories, etc.

7. Direct and Indirect Competitors:

To understand the future of the company and the industry, you would need to research its direct and indirect competitors in the industry. This analysis would also help you realize the USP, the differences, pros, and cons of the company you are interested in. Examine the future industry prospects, any major global competitors that want to enter the local markets, research and development activities, impact of technology, etc.

8. Company’s Debt:

Debt constitutes one of the significant liabilities of any company. However, making sure the ratio of the debt to asset or revenue is in the green is of paramount importance. Hence, study about the short-term and long-term financial debt obligations of the company and the free cash flow available to pay it.

9. Stock Resilience:

It helps to check if the stock has fallen less in a  bear market and has recovered/risen faster in a bull market. This gives an idea of the resilience of the company. Yes valuations do matter and sometimes some companies may be overvalued but in our opinion resilience is a better metric to track.

The steps mentioned above can help make an informed decision about your investment. However, you would still need expert advice to understand when it is the right time to invest in a stock and how you can optimize the returns on your portfolio. You can engage a SEBI Registered Investment Advisor, who relies on a proven philosophy and a system to implement the same.

Happy Investing


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