When stock markets are in turmoil, like now – Sensex up 300 points one day and down 500 points the next – the tendency of many small investors is to get paralysed by fear. They tend to sell their stock holdings just when the market nears a bottom.
Fear is a strong emotion that is difficult to control – specially when your hard-earned money is going down the drain. It is also the single most important reason why small investors don’t make as much returns from their stock holdings as they should.
There is of course another important reason why returns from stock investments are often meagre: poor selection of stocks. In a bid to generate outsize returns, small investors chase ‘cheap’ or momentum stocks with non-existent fundamentals.
So, how does one select good stocks? By learning the basics of fundamental analysis. And how does one go about doing that? By studying annual reports of companies. Annual reports analysis can be tedious and boring – but it is an essential skill if you want to invest in stocks.
It requires nothing more than common sense, knowledge of junior school arithmetic and basic accounting concepts. It isn’t rocket science. Thanks to the Internet, annual reports are readily available on company web sites.
To help you get started, here is an article from investopedia.com. Bookmark the article if you are a new stock investor. There are lots of useful links in it that you may wish to go through.
The article can help seasoned investors as well. It is always good to brush up on your fundamental analysis skills. And, who knows? You may even pick up a few new insights.