How do you choose stocks for investment? With Nifty having more than 1500 stocks to choose from and Sensex Also Having many stocks, it is often very confusing to get our hands on the right stocks. Stock screening is the art which every investor should know before investing in the stock market.
Warrren Buffet’s only rule in the stock market is: Dont’t loose money . If we don’t choose the wrong stock then we will surely not loose the money. So here are the top 10 criteria associated with a bad stock:
- Average Return on Equity for the past 3 years < 10 ( Logic: bank gives you on an average 7% return and inflation rate is 3.8 % so you should atleast get 10% returnt from your investment, otherwise it isn’t worth it)
- Debt to Equity ratio >1.( Excluding banking stocks)
- PE ratio > 30 for small cap and PE ratio >50 for midcap ( In NSE Top 100 companies in Market CAP are large cap, 101-250 are midcap, 250 onwards are smalllcaps )
- Profit After Tax is less than 5crore.
- Stocks having institutional holding less than 5% ( check on moneycontrol app for instituitional holding)
- Stocks where promoters’ have pledged more than 30% in small cap stocks, and more than 50% in mid caps.
- Market capitalisation is less than 250 crore.
- Average daily value is less than 50 lakhs( average daily value= average daily volume * shareprice).
- Debt to FCF(free cash flow ratio) is greater than 3.( FCF= Net cash flow from operation- purchase of fixed asset(can be found in balance sheet))
- Financial trend of the stock is negative. It is better to buy stock when breakout has happened rather than on consolidation phase.More on fintrend in trading section.
I believe by having the above point in mind you can avoid the dangerous and non investor friendly stocks. Always follow one of Buffet’s rule in investing, i.e. Don’t loose money . It will go a long way in your wealth creation.