Basic criteria for stock selection

Whenever we are at the crossroads of selecting a stock we often think of proper technical analysis, fundamental analysis, news related to the stocks and trend lines and the list goes on.

But more than all these it is the psychology of a person which helps him in stock selection.

The most important step in stock selection which we fail to recognise is that while selecting the stock we are deleting few stocks.

Prioritising few stocks and deleting other stocks is a very crucial step. Leaving few stocks is an integral part of the stock selection decision making.

Suppose a trader has decided to invest in banking sector. This sector provides the trader with stocks at various prices ranging from Rs 100 to Rs 2,000.

Most of the traders would prefer the stocks which are cheap and an inexperienced trader will definitely opt for purchase of the cheapest stock. The reason being for this decision is presumptively low risk.

Contrary to this, the costliest stock actually performs well and even though the risk is high the profit also is high.

The low cost stocks maybe overbought because of the cost factor also. In expensive stocks the pain to be undertaken by the trader is high and so is the gain. We need to firmly believe that there is no gain if there is no pain.

Choice of an expensive stock makes us more prudent in our decision-making analysis. Investment is limited to the extent of capital available by the trader.

In smaller stocks there is overcrowding and over ownership. There are very few takers for expensive stocks. If at all a movement is observed in this particular sector the expensive stocks are the first to react to this.

Try to select those who are the leaders of the players of that particular sector. When penny stocks enter into the category of small or mid caps then we should consider them because by then the selling pressure comes down.

Let us consider a situation where a trader has Rs 10,000 as his capital. He has two stocks before him costing Rs 100 and Rs 500. Untrained trader would go with Rs 100 presuming he would get a greater number of shares.

Smart trader would go with Rs 500 stock because he knows that even if the stock is expensive and his shares are limited the profits which this particular stock is going to fetch would be high owing to its performance.

So, in the process of selection of stocks, deselection of some stocks is also very important decision. Thus, stock selection is based on the psychology of a trader also.

(The author is a homemaker who dabbles in stock market investments in free time)