How to Pick Stocks for Long Term Investment [Stock Picking Strategies]?

1. Fundamental Analysis:

Fundamental analysis is the first and foremost step that almost all analysts implement for selecting some good long term investment stocks. There are various fundamental factors which are analyzed to get an overall idea about the financial health and actual value of the stock of any company. All those stocks which are under valued i.e. the price of the stock is below its actual value, can be a good buy. Let us discuss about some of the commonly used fundamental analysis strategies.

• Consistency of Dividend: The predictability in the earnings of a company can be judged on the bases if the consistency of the company to pay and raise dividend. If a company is paying regular dividends, it shows that it is financially stable enough. There are various opinions on how many years should you analyze to look for the consistency, but these range provides you an idea about the financial stability of the company.
• P/E Ratio: This is the most common toll to look for over valued and under valued stocks. The P/E ratio or price to earnings ratio is a ratio of the current price of a company’s stocks and the company’s earning per share. A higher P/E ratio indicates an over valued stock which could pullback anytime in the near future. On the other hand, a lower P/E ratio indicates an under valued stock which can be an attractive value because the markets have pushed the shares below their actual value. The P/E ratio of a company is usually compared with the P/E ratio of the overall sector or market to conclude whether the stock has an attractive valuation or not.
• Value Traps: A stock that is cheap and undervalued is not necessarily a good buy. It can be a value trap as well and can head a lot lower. Value traps are analyzed on the basis of debt ratio and current ratio of the companies. Debt ratio is the total amount of assets of a company which are bought on finance or debt. It is calculated by dividing the total liabilities of company with its total assets. The higher the debt, the more are the chances of the company being a value trap.

2. Economic Indicators:

Using economic indicators is the second step in selecting the best long-term stocks. There are two different ways to use economic indicators to get an idea of what is happening with the markets. Let us discuss about both of them.

• Economic conditions: The stock market indices are considered forward looking economic indicators. For instance, a consistent weakness in the Nifty 50 could signify that economy has started to top out and the earnings could fall as well. The same concept applies if the indices show a constant rise, but the economic numbers show that the economy is still weak.
• Evaluating the “Big Picture”: Using the daily headlines as an economic indicator can be a good way to gauge how long term buys relate to the economy. Using contrarian indicators from the news media to get an idea whether the markets are becoming overbought or oversold.

Long-term investing requires lot of research, discipline and patience. You will come across various long term investment options when the company or markets are not performing so well. But you can use these fundamental tools and economic indicators to find the hidden gems by avoiding potential value traps. You can ease out the process by planning your long term investment with Market Neuron, which includes a selection of 6-10 stocks selected by qualified analysts based on fundamental research. Before planning any investment you should mandatorily check your risk appetite to get an idea about the amount of risk you should take in the market.