How to pick a Stock : Supply and Demand,Position and Institutional Presence

 

Are there any other factors other than fundamental analysis (yoy results, qoq results and news) to consider in order to improve your selection of stocks for investment? Well, there are many. As investment is a journey, you will learn a lot of things on the go. But here are few important ones to cover:

  • Supply and Demand
  • The position of your stock’s company in it’s industry
  • Institutional Interest

1)Supply and Demand:

As we all know the law of supply and demand governs the price of everything. So the stock market is no exception to this basic principle. Believe us it’s more important than any expert opinion.

Why is it so?

Let me explain.

Supply and demand in action:

If we have two stocks to invest in one with the volume of 10 million shares outstanding and other with 50 million, we insist you choose one with less volume if other factors are equal.

Jet airways: Volume: 5,278,721

Stock with high volume outstanding shares

Interglobe Aviation: Volume: 584,557

Now if you notice the percentage change of fall from initial to end. For jet airways : 175-640/640 = 0.72 and for interglobe aviation : 775-1500/1500 = 0.48. So less volume is good for investment.

Even better for you if a large percentage of ownership is to top management of the company. Why? If top management holds a large stake in the company then the supply of stocks to the public would be less, which creates a supply-demand gap. Hence favors an investor interest better.

Jet airways: Promoter Holding: 51%

Interglobe Aviation: Promoter Holding: 74.93%

What Sort of management:

Most multinational corporations have “caretaker” sort of management. You might be thinking why I named them “caretaker”. It is because these managements don’t own a meaningful portion of stocks in the company, which results in a management less willing to innovate, take initiatives and keep the organization to the best. Obviously, there are exceptions but this is true in general.

Additionally, multiple layers of management create an information gap, which leads to a difference in info between senior management level and customer level.

Whereas, entrepreneurial management, mostly present in small and medium-sized young companies, is responsible for inventions and exciting products and services. As a result, these organizations grow much faster.

Now you will point that large corporation does invent as well. I agree but because of its own size, its effect on the stock is more subsided as compared with small and medium-sized organization considering other factors similar.

Stock splits can hurt:

Companies management sometimes make the mistake of excessively stock split. So what stock split means: Companies offer extra stocks for the stocks already held by investors. For eg. 2:1 split means 2 stocks for every 1 stock held i.e. if you have 10 stocks of the company it will increase to 20 after the split.

Now you think why is it a mistake, it looks good that an investor gets extra stocks from the company without paying anything. But excessive splits create a large supply of stocks and hence leads to further division of the company’s profit to additional stocks.

If it is bad why management allows stock split.

Management thinks that stock split will attract more buyers as the stock will sell for a cheaper price per share. This may occur but will not have a good effect. As this will drive away knowledgeable investors and attract traders, an instance, which is never good for a stock.

So what do we suggest?

Look for companies buying their own stocks:

A positive sign in a company is if it is acquiring its own stock in the open market over a consistent period of time.

Why it is good?

As the company buys back its own share, so the number of shares available in open market decreases. Now total company earnings will be divided among a smaller number of shares. This increases earnings per share. I hope you remember earning per share. If not here it is:

 

Also, do you remember the percentage increase in earnings per share is one of the principal factors to find outstanding stocks?

What else should you look for:

Low debt to equity :

Lower the debt, safer and better the company. A corporation reducing its debt consistently is worth considering.

 

2)The position of your stock:

Most people buy stocks they feel comfortable with. But here the problem is most of these picks are sentimental moves rather than leaders in the stock market.

Avoid Sympathy Moves:

In stock market history remains the same and keeps on repeating. Eg

Sympathy moves are stocks in an industry group of a leading stock but have mediocre or weaker financial performance. And they follow “in sympathy” of the leading stock price movement.

 

……

Institutional Interest:

As we already know bigger the demand better. And bigger demand comes from institutional bodies. Additionally, Institutional bodies take interest in a company after a lot of due diligence. So it plays a role of assurance to investors to step in and invest. Therefore Institutional presence gives a dual benefit: institutional demand and public demand as well.

Conclusion:

Even though these factors might sound like peripheral but take it seriously. As without these factors, you won’t succeed in long-term. As with your money, we don’t want any corner uncovered. Be cautious, enjoy your investment with peace.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Experience of 8 years in stock investment. I learned everything by making a lot of mistakes and losing a good amount of money, I am here to make sure you don’t lose on either: Hope or Money.

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