Do Due Diligence Before Investing In Stocks Or IPOs

Queries

I want to invest in the stock market, but don’t know how to proceed. What do I do?

Investing in markets is not that complicated. What you should critically examine is whether the company, whose stock you are investing in, is in a business which will grow over the next 5-10 years or more, its pedigree, and financials. For example, if you think electric vehicles is the future, you should think of the best companies in this sector, and so on. Even simpler is to invest in the top 50 companies in India through an exchange-traded fund (ETF) or start a systematic investment plan (SIP) in a mutual fund.

How can I get access to a company’s financial information? What key things should I look for to evaluate its performance?

Many brokerage platforms provide insights on company financials, growth, bulk deals, and corporate action news which affect the stock, on their apps or websites. The things you should consider while looking for such information are as follows:

• Valuations: You should check for multiple ratios, including price to earnings (P-E), price to book, price to sales ratio, etc, whether it is high or low and so on. Valuation is a relative factor, and not an absolute matrix. Also, check sectoral P-E and company’s own past P-E.
• Earnings Growth: Check the earnings growth and trajectory against its own performance and against its peers.
• Debt To Equity Ratio: Check if the company avoids debt traps, more so in a high interest rate scenario. Also look at the rate the company is borrowing at versus the market rate.
• Free Cash Flow: This reflects the health of the company. It helps it reinvest for growth without external borrowing dependencies and is a sign of long-term prosperity.
• Dividends: Healthy dividend payout helps get better return. But very high dividend payout is not always good as it reflects that the company may not have growth opportunity. Instead, consistency is important as it reflects that the company is generating free cash flow.
• Promoters/Institutional Holdings: This shows the promoter’s involvement in the business and institutional appetite. Ascertain whether institutional clients are long-term investors or hedge funds.
• Margins: This will show how they are doing compared to peers.

Will investing in an initial public offer (IPO) provide better returns than an established stock?

Typically, companies raise capital through an IPO for future growth. Companies do an IPO to be listed on the stock exchange. For investing in either IPOs or listed stocks, do proper diligence and check aspects, such as the company financials, its promoters, the sector it belongs to and the growth prospects.

Answers by: Saurav Sultania, VP, Equity Product Group, ICICI Securities

Disclaimer

Views expressed here cannot be construed to be a decision to invest. The recipient(s) should make their own investigation or seek appropriate professional advice to understand the specific legal, tax or financial implications. Mutual fund investments are subject to market risks, read all scheme related documents carefully.