The investopedia.com web site is one of my favourites because they have such a wide variety of useful articles and tutorials aimed at small investors. Whether you are interested in learning about fundamental analysis or technical analysis, trading or investing, equity market or debt market – you will find something of interest.
For most small investors interested in the equity market, the place to start should be to learn as much as possible about the company whose stock you wish to buy. But the problem for many small investors is: which companies to choose from the thousands that are listed in the stock exchanges.
There are no formulas or rules that work for every one. The concept of “Circle of Competence” has been recommended by Warren Buffett. It means investing in the stocks of only those companies whose businesses you clearly understand. You should be able to assess with reasonable certainty their business model, competitive advantage, strengths and weaknesses, future growth possibilities.
What if your “Circle of Competence” is very limited? You are not in a minority of one. The “Circle of Competence” expands with experience. What to do till then? Stick to sectors that are known for consistent performance over many years. Such as? FMCG, Pharma, Financial Services. You don’t need to own stocks in 20 different sectors. Owning a couple of good companies in 3 or 4 sectors should be enough for a core portfolio.
Once you have decided on the sectors, you need to go through fundamental analysis to identify the better stocks from each sector. In a recent article by Jonas Elmerraji, 5 important metrics for value investors have been explained. Read the article at this link.