The very
first step before investing in a company is to obtain understanding about the
company and its environment. Because if you will go directly in analysis of
financial information, it might happen then after doing complete analysis you find
out that company’s industry is not good or company’s environment is not good.
That will make all your efforts meaningless. Here we will discuss how to obtain
understanding of an entity before investing in it.
Industry –
Before picking any stock do analysis of industry that how this industry
is performing in few past years and how it may perform in future. you may check
the growth of the industry and stability in the industry. just like if
government announce extra tax and duty on automobile sector it is possible that
your stock is not going to perform very well in near future. you must check how
company is performing among other companies in same industry.
Regulation-
You must check which law and regulations are applicable in the company.
Small changes in such law may bring huge impact on companies performance. You
must know the regulators of industry in which company is working. It is obvious
if company is listed SEBI will be one of regulators. Say company is in telecom
sector TRAI will be one of such regulators. You may not know complete law which
are regulating , but you may keep an eye of upcoming news and notifications.
Operation. –
You can check the operation of the company by checking NSE . as per sebi
guidline companies submit some information about companies recent deals. You
may check the news about the company how company is performing.
Shareholding pattern.
Shareholding pattern helps a lot in understanding promoters intension
and ownership of the company. If promoters are reducing there share in the company
it will surly have an impact on price of such share.
In case of yes back rana kapoor
had some shareholders which were investing companies, and they were holding
significant amount of share in yes bank but they pledged their shares and took
loans against them and they were giving such loans to the yes bank as pretended
loan.
In accounts shares of yes bank were not pledged but they were pledged
indirectly.
Corporate governance.-
Governance
has vital role in analysing quality of a share. Good governance is where all
stakeholders are involved in decision making. Company must be following rule of
law transparency must be there in operation of the entity. Proper accountability
must be set for each job. Such good governance helps in maintaining ethical
behaviour in the enterprise and reduces the risk of fraud and other such
activities
Finance
The way company is finance means. How the company has arranged money for
its business whether company has take loan or issued debenture. From whom the
company has taken loan what is proportion of debt and equity in the enterprise.
Investment that company
has made and company is going to make.
If company is making investment in such sectors, where company has low competition
or might have better scope in future. Investing in such stock might be
profitable for you. But if past investment of the company wasn’t good and
future investment is also attracting lots of business risk, in such case
investing your money may lock your money in such company for very long time.
Conclusion.-
Financial
performance matters in selecting a share of a company. but before that you need
have basic understanding of the enterprise. Because if company is strong,
company might give you good return in future, even if financial performance is
not good in present. Such companies are more of an opportunity for the
investors.
