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Friday, August 12, 2016

How to do 'due diligence' before buying a stock

The Indian economy is back on the growth path. Liquidity is sloshing around. FIIs are buying. The stock market has shaken off the bears and is rising towards its lifetime high. 

You are either a smart investor who entered at lower levels and are enjoying the bull ride. Or, you are a new investor feeling anxious whether to enter the market now or wait for a correction.

Either way, you may be interested in catching hold of the 'next Eicher Motors' or the 'next Page Industries' or the 'next Yes Bank' and becoming a 'Crorepati'.

Successful investing requires more than luck and pluck. It requires serious hard work, discipline and patience.

Most of the hard work - or 'due diligence' - should be done before buying a stock. What is 'due diligence'? It is the process of investigating all available information about a company whose stock you are thinking of purchasing.

What does 'all available information' include? Financial information available from Annual Reports. Stock price history available from stock exchanges. Brokerage reports. Industry reports. Reputation of company management.

That seems like a lot of 'available information' to investigate. What if one doesn't have the time or know-how to do all this investigating? Isn't there a shortcut?

Fortunately, there is. You can leave the 'due diligence' to experienced fund managers by starting a SIP in a diversified equity fund or a balanced fund with a track record of 5 years or more.

You will still get the benefit of good long-term returns - provided you hold on to the fund units for the long-term - without the hassle of going through Annual Reports, Brokerage Reports and Price charts.

In fact, a SIP in a good equity fund or balanced fund is the best way for new investors to start investing in the stock market.

However, if researching companies excite you and making outsize returns from the stocks of less known and 'undiscovered' companies gets your adrenaline pumping, then performing 'due diligence' won't seem like a chore.

So, prepare a 'watch list' of companies based on their past, current and likely future performances and start your 'due diligence' to prepare a shorter 'buy list'.

Haven't done proper 'due diligence' before? 
Read the article by Ryan Barnes: Due Diligence In 10 Easy Steps

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