Life as we know it is very predictable. But if you maintain your discipline and focus, you can accomplish important things in life. Similarly, approaching investments with a focused approach can generate enormous wealth. Luckily, there are always ways to increase your chances of investment success.
Now, let's break down the process of analysing a stock in detail.
Investing in stocks breaks down to the components like -
Industry analysis
Business analysis
Management analysis
Behavioural analysis
Valuation analysis
Industry analysis
Fish are always limited by the size of the pond. So as an investor, we don't want to enter an industry that isn't growing. We are here to make money, but getting the process right is essential. We need to understand the industry, how it is evolving and what its strengths and weaknesses are. All of this is condensed to give you a good idea of how well the industry will thrive in the future and ultimately determine your return on investment. Interestingly, each industry has a set of parameters to measure its performance. For example, the book value of a company is very important for a bank, whereas the telecommunications company considers Average Revenue Per User (ARPU), and the commodity sector focuses the cost of production.
Economic analysis
As an investor, we need to develop a keen eye for analyzing the deals that are about to undertake. Each company has its own analysis and one company can be completely different from another, even within the same sector. For example, KPIT Technology focuses on enabling next-generation mobility technologies for the automotive industry, while LTTS provides engineering, research and development solutions to its customers. Even in IT, it depends of where your optimism is in to invest.
Management analysis
Top management is the most important driver of a company. The growth of a company depends on the performance of top management. Top management should include high-level company executives such as Directors, Chief Executive Officer (CEO) and Chief Financial Officer (CFO). When we talk about good or bad control, we are referring to the highest officials who have the power to make decisions. As a shareholder you are the owner, operated and controlled by management. Therefore, it is important to evaluate them before investing in companies. Additionally, senior management's performance must be measured in both good times and bad times, so going back he recommends looking at management over a decade or more. For example, in the last 20 years, Titan has recruited top management from IIM'S, IIT'S, and that growth can be seen in the stock price as well.
Behavioural analysis
When it comes to investing, we make rational decisions, so behavioural analysis is key. This is because we make decisions from our deepest emotional space. The biggest drawback of these prejudices is that they make the facts and mislead investments. Therefore, in order to overcome these prejudices, we need to know how different prejudices work and how they influence our decisions in everyday life.
Valuation analysis
Last but not least, analyzing company valuations plays an important role. Even after analyzing the company, it is possible that the price of the company will fall after understanding the business as the valuation is not sustainable. called a safety margin.
So, before buying a company these are the basic things which can be analysed and the investing can be made.
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