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How to Choose a Potential Stock?

Stock market investments are generally favored by investors for their profitability. However, for someone new to the subject, acquiring shares can be complex. Several criteria and indicators are developed by financial analysts to guide decision-making. These criteria make it possible to choose the interesting shares and thus to carry out profitable operations on the stock markets. Let's discover together the criteria for choosing a share on the stock market and making an investment while maximizing the return.

The Fundamental Analysis


There are several analytical methodologies for whether or not to acquire shares on the stock market. Fundamental analysis is widely used by financial market specialists because of its principle: to define whether the company in which one wishes to invest is in good health.

Fundamental analysis is therefore based on a simple foundation: determining the level of risk in order to know whether it is wise to acquire the shares of a company. It is then necessary to look at the values relating to the economic and financial health of this company called: the “fundamentals”. We are interested in data such as:

 

1.The share price.


2.The turnover generated by the company.


3.The cash flow.


4.The debt ratio.


5.Net earnings per share.


6.Equity.

 

The Fundamental Criteria For Choosing a Stock

 

In order to determine the health of a company listed on the stock exchange, it is necessary to refer to the balance sheets made public by the latter. The investor can then use the published data to determine several criteria for choosing to acquire a share. The main indicators showing the situation at a given time are:

Turnover (CA).
Earnings per share (EPS).
Gross Operating Surplus (EBITDA).
The “leverage”, or “financial leverage” which corresponds to the ratio between the debts and the Ebitda (the gross profits of the company)
The ROE, "return on equity", making it possible to measure the profit produced according to the capital contributed.
In addition to these indicators, criteria are used to anticipate future variations, such as:

The PER, for Price to Earnings Ratio, makes it possible to determine the value for which investors are ready to buy a share to generate €1 of profit. The PEG, Price Earnings to Growth, which is determined by relating the PER to the estimated growth of future earnings.

The PER gives indications on the current price of a security: is it estimated at its fair value, over-quoted or under-quoted?

It is often preferred over the course of action to get an idea of the value of the latter. On the other hand, the PEG makes it possible to account for the long-term growth of profits. It is determined by a ratio between the PER and the growth of future profits. The analysis of the financial situation is based in particular on the management of the company's debts. Leverage is thus used: if the latter is less than 3, then the company is in a correct situation with regard to the repayment of its loans.

These criteria only make sense in a grouped use. Alone, an index does not make it possible to make a decision. Used together, with complementary indicators and within the framework of an activity sector, they make it possible to know if the company is experiencing growth, if its financial situation is healthy and if the company is making sufficient profits.

 

Technical Analysis

 

The analysis of fundamentals mainly allows to know if a company is viable at a given moment. It also makes it possible to anticipate future developments: an investor must plan for the long term. Nevertheless, if fundamental analysis allows to know the best actions in the long term, it does not allow taking action in the short term. Technical analysis thus complements fundamental analysis for decision-making when entering a position.

 

Get Into Position at The Right Time

 

Choosing a stock therefore requires arbitrage over the long term but also minimizing the loss over the short term. Thus, certain indicators make it possible to know when to enter a position on a stock market, such as:

The DMI, for Directional Movement Index. This indicator makes it possible to appreciate the trends of the price of a share.The RSI, meaning Relative Strength Index. This criterion measures the pressure on the price of a share.The Ichimoku indicator, a technical tool allowing to appreciate the fluctuations, supports and resistances of a course.

 

Diversify Your Equity Portfolio

 

The most important thing in choosing a stock market is to minimize risk. To do this, you must not forget to diversify your equity portfolio and thus invest in companies operating in sectors.