How to select stocks for investment?
After deciding to invest as a beginner in the stock market, it is time to learn how a first-time investor should start company analysis. And to choose the right stock for one self. How exactly we can track a company and its performance - what steps do we need to take, and the tools that can help us, these are the questions which need to be answered, before you enter into the field of stock markets. So the first thing that is required is to choose stocks or companies, which you understand. Stocks which you can track in your day to day life. Say Domino’s which we discussed. We understand the concept and business of Domino’s and can relate to it.
However to get a proper structure, there are two ways you can select stocks for investment.
The 1st approach is known as the Top-Down approach. In this approach you select a sector and find out the best company in that sector. The 2nd approach is the Bottom – Up Approach where you select a company and then figure out which sector it belongs to and what kind of scope that sector has.
To choose the right stock, one has to understand the business of the company and understand the sector which the company belongs to. If the sector has potential to grow, the company will grow too.
Let's go back to the Domino’s and Jubilant Foodworks example.
So this company is mainly into delivering Pizzas. One can order sitting at home or workplace and can enjoy hot yummy pizzas. So now if you look at the sector and from the macro point of view, due to the pandemic, people will refrain themselves from going out to restaurants but still want to enjoy good food and pizzas, they will order food online. With the ease of technology and the service, people and especially millennials have resorted a lot to order food online. You need to look around the common things, lifestyle of people, economy and you get stock ideas from there.
"You only have to be able to evaluate companies within your circle of competence. The size of the circle is not very important; knowing its boundaries, however, is vital"- Warren Buffett.
As Warren Buffett, the world's most successful investor ever has said so often: "Know your circle of competence and stick within it." Let us understand the concept of 'Circle of Competence' in the next section of our module.