How to find the best stock to invest?
It may seem complicated, but the underlying rule to stock-picking is simple.
The best stocks to invest in have two characteristics in common – they are undervalued and they have a high growth potential. You can use two techniques to see if a stock has these characteristics:
Fundamental analysis helps you find the best shares to buy by analysing whether a stock’s market price fully reflects its future revenue-generating potential. Technical analysis helps you find the best stocks to buy by predicting future stock price movements based on historical patterns. Here is how you can pick stocks using these approaches.
Invest in best stock by analysis
Fundamental stock analysis
This stock analysis approach centres around a stock’s intrinsic value.
Intrinsic value is an estimate of a stock’s ‘correct’ price based on your analysis of the company’s profit-making potential.
A company’s profit-making potential can be analysed through a thorough examination of its financials, internal operations, and business environment.
The market price of a stock also tracks the company’s revenue growth potential. It should, therefore, be the same as the stock’s intrinsic value.
Analysis of Stocks
Fundamental analysis involves identifying stocks whose market price is below their intrinsic value. Such stocks are undervalued because their market price doesn’t adequately reflect their revenue growth potential. They should appreciate and reach their intrinsic value, which makes them among the best stocks to buy. Let’s look at an example.
Suppose you have calculated Rs.100 as the intrinsic value of a stock. This stock is currently trading at Rs.80. Since the market value of the stock is below your intrinsic value estimate, you can consider the stock to be undervalued. This stock could have an upside potential of 25%, making it one of the good stocks to invest in. You may buy it with a price target of Rs.100.
Technical stock analysis
Technical analysis helps identify the best shares to buy by predicting future stock prices based on an analysis of historical price patterns. You can identify these patterns based on a set of qualitative and quantitative techniques, called technical indicators.
Qualitative indicators are used to find ‘support’ and ‘resistance’ levels, i.e. invisible ceilings and floors that restrict stock price movements. A stock will not appreciate beyond its invisible ceiling (support). This is the level at which you should sell it. Similarly, a stock will not fall below its invisible floor (resistance). This is where you should buy it.
Quantitative techniques seek to identify whether a stock is in an ‘upward’ or a ‘downward’ trend. You can identify these trends by using moving averages and momentum indicators. You should buy stocks that indicate an upward trend as they are likely to appreciate. You should sell stocks that are on a downward trend because they will probably slide further.