Picking the right stocks for your portfolio is a job easier said than done. While there are hundreds of companies to choose from, most new investors find it very difficult to pick the right ones. If you want to build a stock portfolio, these are some thumb rules that you should live by.
The rising awareness of the importance of investing has encouraged a lot of people to think about investing in stock markets. With several stocks offering exceptional returns in the past several years, the stock market is often the go-to option for a lot of people new to investing. But while opening a demat account is super easy these days, picking the right stocks for your portfolio is certainly not.
While there are hundreds of companies listed on Indian stock exchanges, most of the new investors find it very difficult to pick the right stocks. If you are struggling with the same, here are a few thumb rules that can help.
- Understand your Goals
Before you start picking stocks, it is crucial first to understand the purpose of your investment. Be it capital appreciation, capital preservation, or income; every goal has different criteria for investment and stock selection.
For instance, blue-chip companies can be an excellent choice for someone aiming for income preservation due to their stability but not the best choice for someone looking for capital appreciation.
- Learn some Basics
If you are new to the stock market, things can surely appear very intimidating. The confusing jargons and high risk of the market often discourage new investors. However, things are not as complicated as they seem at first. Start by learning some basic yet essential things about stocks.
Some of the most important terms include P/E ratio, dividend yield, and revenue growth. Know what these terms mean and how they affect the performance of a stock.
- Select a Sector
As you are new to the stock market, it is better to invest in a business you are familiar with. For instance, if you are an IT professional, pick something from the IT sector or if you are working in FMCG sector, choose reputed FMCG companies.
Apart from familiarity with the industry, selecting a sector that you understand also makes it enjoyable and easier to follow the stock and the sector.
- Check the Price History
Once you know your investment goal, basics of a stock and your preferred sector/stock, start checking the price history. Most new investors only check the highs and lows in the last one year and buy the stock when they see that the stock is trading close to the yearly lows as they believe it has excellent upside potential.
But this might not always be true, especially when the bull market is being taken over by the bear market. So, make sure that you check the price history of at least 3-5 years when selecting a stock.
While you are familiar with the IT or FMCG sector, you should never invest all your money in a single sector/stock. If you like a particular NSE stock or sector and believe that it has excellent potential, invest most part of your investment money in that stock/sector but also invest in other companies.
Diversification is one of the best ways to protect your investment if a particular stock or sector starts crashing.
With the economic condition of India improving consistently, it is an amazing time to start investing in the stock market. If the fear of picking wrong stocks discourages you, the rules mentioned above are sure to eliminate most of the back-breaking work.