Wealth creation is not as easy as it may seem; it comes with a lot of challenges and includes lots of securities. One of them is shares. However risky they look, more than 90% of the asset allocations are inclusive of equity investing. It is important to note that the allocations in equities also give some decent returns. You are aware of the fact that lower P/E stocks are usually better than higher P/E stocks and your portfolio should be highly diversified. People are also aware of the fact that a balance sheet with high cash balances and lower debt is superior to those with the opposite scenario.
Now when you have the basic knowledge of choosing a stock and may have some technical knowledge too, you are all ready to invest! But wait! You have a lot of stocks to pick from. How to choose? Going through every stock is a tedious task, and this for sure is not the way! If you are new to the NZX market, you need not worry. We have a guide handy to help you navigate the difficulties in the uncertain world. Also, if you think that selecting a security solely based on the stock screener will help, please note that this does not give you a complete representation and is susceptible to mistakes.
Best Practices for the new investors to pick quality stocks on the New Zealand Stock Exchange
- Know the Purpose and Goal of Investing: The first and the foremost step in investing is to know what your goal of investing is. Is it keeping aside your income, or you want to benefit from capital appreciation or you some different criteria? Investors with lower risk tolerance usually look for capital preservation and tend to invest in stable companies, more likely the blue-chip stocks. On the other hand, Investors with the purpose of capital appreciation will focus more on different ranges of market capitalization and should target companies at different phases of life cycles. Don’t forget to keep in mind the aspect of diversification. You may take up different strategies or a combination of two and try picking up stocks.
- Be an Informed Investor: Keep your eyes and mind open and update yourself with the current market happenings and news. Try to read the newspapers with business information or engage yourself in online blogs in some passive research. Kalkine Media is one such source. Sometimes news articles and blogs become the foundation of investing. For instance, latest market information such as mergers and acquisitions or another significant event which are analyzed from multiple perspectives by different investment professionals can be insightful and hence, can justify the addition of the specific stock in your portfolio. Once you are satisfied with the specific information from different sources, you can start your own qualitative search using the company’s presentation and reports. The next step comes in where you must pick up your stock rather the potential choices. You may take help of the stock screener, plugin the criteria and continue your stock analysis. Make sure you analyze both sides of the argument and keep in mind the advantages and disadvantages each strategy has to offer. While taking help from a financial advisor can be time consuming, the benefits overweigh the time constraints. Deep understanding and market experience can help you navigate through uncertain times.
- Company’s Presentations and Reports: When you have shortlisted the potential stocks that you might want to invest in, turn your attention towards the company’s presentation. You will get an idea about their business models, growth opportunities, future guidance, and general overview of the company. A decent understanding of the business will further refine your search and will help your in-depth scrutiny of the company. You can also compare the performance of the company with its peer groups and check if it has any potential to outperform its competitors.
- Qualitative Analysis: Firsthand knowledge and data of the company’s profitability and debt profile is a must. Generally, the lower the debt-to-equity ratio compared with the industry average, the less risky it is. Another essential metrics is to check if the stock is not very expensive to buy, check its 52-weeks’ trading levels, valuation multiples like price to earnings multiple, and EV/EBITDA multiple, among others. Based on this information, try to formulate a long term view of the market. See how the management of the company has performed all these years and try investing in stocks, the valuation of which is not very expensive.
- Keep your Emotions in Control: Keep a check on your anxiety levels and do not engage panic buying or selling. Trading based on rumours spread or deciding basis herd mentality can result in more losses than you have gained. Check the proper news and developments and if there is any chance that it is false, let go of the opportunity and keep an eye on the stock. One thing you can look here is to check if what the promotor is up to. Over time if the holdings have increased, that means they are confident in the company.
Bottom Line: At the end of this research, you may be left with fewer prospects and will be able to decide which industry fits your criteria. This research will help you save from a bad investment decision and will keep your say in the aspect of picking up the right stocks. To re-iterate the process, focus on your budget and the way market is trading. Keep yourself updated with the latest business news and find standard parameters which you think might help you make decisions in choosing a stock. Do the qualitative assessment and check how the company has performed over the years. Also, do not panic buy or sell and make informed decisions.