Selecting strong stocks is not a challenge if investors use the right strategies.
Of the many indicators, four main things to consider are the company’s potential growth; the quality of the company’s business; the market value of the stocks; and the liquidity of the stocks.
A company with strong potential will have more opportunities for growth. The term “growth” here refers to sustainability, competitiveness and profitability.
A company’s potential for growth can be examined by looking at the type of industry and the nature of the business, which are the clearest indicators of how far a company can go.
For example, global trade volumes continue to propel the imports and exports sector, which in turn spurs the growth of the port.
A company that can flexibly adapt to rapid changes in industry trends, such as tech companies, will be more competitive and likely winners due to low production costs, high productivity and efficiency, and access to large markets.
The potential of a company can also be seen through consistent growth in the number of clients and revenue and profitability, which measure sustainable growth. And these are catalysts to boost viability.
Quality of business
To invest in stocks is to invest in a business, and investors have to clearly understand a company’s business quality, including its management team, corporate governance and financial statements, as well as other financial ratios.
While strong, reliable management will lead a company to its goals, corporate governance is important in preventing corruption, fraud, cronyism, conflicts of interest or a dependency on any particular person.
Effective corporate governance can be achieved by setting up a strong system of checks and balances in a company’s structure by differentiating certain rights and obligations between the various stakeholders, including shareholders, the board of directors, committees and senior management.
Looking at a company’s financial statements is particularly beneficial when making any investment decision.
These will illustrate how efficiently a company manages its business and allocates its assets to maximise profits, as well as its ability to pay debt.
When comparing different companies, investors should consider ratios such as profit margin, return on equity (ROE) and return on assets (ROA).
Investors should also look at a company’s debt levels and its ability to repay debt by using the debt to asset (D/A) ratio, the debt to equity (D/E) ratio and the current ratio.
Market value of stocks
Investors should look for undervalued stocks and not just choose cheap stocks. Normally, two of the key metrics to discover whether stocks are undervalued are the price to earnings (P/E) ratio and the price to book value (P/B) ratio.
With these ratios, lower is better – stocks with lower ratios compared to the industry average are undervalued.
Additionally, dividend yield represents the total return on an investment as calculated by dividing the dividend per share by the current stock price.
Investors should consider investing in stocks with a higher dividend yield.
Liquidity of stocks
Stocks with liquidity can be sold faster on the market. The amount of trading volume indicates the level of stock liquidity – with bigger being better in this case.
Investing in stocks with liquidity is a good choice for investors who for whatever reason may at some point need to raise money urgently.
Short-term investors and day traders, who are looking for short-term profits, also prefer investing in such stocks as they are more likely to return reasonable gains of capital from same-day trading.
Contributed by: The Cambodia Securities Exchange, Market Operations Department Email: [email protected]
Tel: 023 95 88 88 / 023 95 88 85
Disclaimer: This article has been compiled solely for informative and educational purposes. It is not intended to offer any recommendations or act as investment advice. The Cambodia Securities Exchange is not liable for any losses or damages caused by using it in such a way.