Criteria investors should follow for better stock performance

Many a time stock market investors do not know what is the criterion behind choosing stocks of a particular company. Stock performance depends upon a number of factors. Following are a few points which should be kept in mind before deciding to buy stocks of any company.
Earnings-Earnings reflect a company's profit. It is advisable to select companies which have substantial earnings that too not only at present but had been consistently earning for a long period of time. Also, source of company's earning is important. Companies receiving their earning from regular operations are better than companies displaying earnings from one-time occurrence. Firms having low dividend payout ratio indicates that it is re-investing a major part of its earning, thus investors should give more weightage to such organisations, while selecting stocks.

Price-earnings (P/E) ratio- It is advisable to identify those companies which have a lower P/E ratio than other companies in its industry. This is because such discounted stocks of companies are not generally affected by slowdown in the business cycles and pick up fast during favourable times.

Book value- It is advisable to select stocks trading at atmost 1.3 times book value. This is because the lower the stock price in comparison to the book value per share, the better would be the value.

Return on equity- Return on equity indicates the well-being of any company. It is advisable to choose companies which posses higher return on equity as compare to other companies in the industry. Generally, a value of 15 percent or higher is considered good.

Debt-equity ratio- While buying stocks of a particular company, it is advisable to choose companies which have low debt-equity ratios. Below 35 percent is believed to be fine.

Price volatility- It is advisable not to buy stocks which are volatile in nature. Volatility is often related to risk. It is better that stocks move in consistency to the overall sense.

Investment article
by Nisha Acharya