How to Pick Stocks?

Stocks represent ownership in a company. When buying a Stock, we are essentially choosing to become an owner of a Public Company, at least in part.

Therefore, the right question is ‘How to choose a Company worth owning?’

There is immense literature on this matter, I am going to condense the matter to its most essential elements.

The first question we must ask while researching an investment is whether the company provides any valuable product and service to the economy. Because the only way towards legitimate prosperity is by providing legitimate value first. A lot of investments turn out to be mishaps because the investors were not sure of what the company actually does in the first place, therefore also not knowing whether there was actual value being created for the economy.

Then we look at the Revenue (or sales). The Company does something of value, all right. But is it good enough to bring in cash? That is the question which we must ask next. We expect to see a long history of stable, growing revenue while making a prudent investment decision. An eye looking to dive deeper should also look for the various sources of revenue, whether those sources are reliable for the long term, etc.

Now coming to the most important element, Earnings! 

The company has a good revenue record, that's fine. But how much of that revenue is it able to retain as earnings? Or are the costs so high that despite the huge revenue, the company is still a loss? Peter Lynch says that if there is only one thing we can keep a tab on, then it should be earnings, the profitability of the company. That is what makes it valuable to the shareholders. 

Not only should the earnings also be stable and growing, but the profit margin should also be on the rise.

We must also look at the Balance sheet of the company, see whether all the ratios are in good shape. (we will write another article on analyzing balance sheets)

You can also look at the Founder, CEO and the top-level management of the Company, do you believe that those people can beat market expectations? 

Because we at Active Invest, believe in Ethical Investing, you should also look at whether they treat their employees well? If they are conscious of their environmental impact. You should further ask questions like, do they employ child labour or slave labour? You might be surprised to know that Apple, one of the most valuable companies in the world, employs Slave labour of Uighurs in China. In fact, let alone investing, should we even purchase products of such Companies who make money exploiting the most vulnerable people on the planet? 

There are plenty of good companies to invest in, which are adding great value to the economy, to the lives of their employees and their customers, with healthy profit margins, without harming the environment, or taking advantage of vulnerable people, and at Active Invest, it's our goal to help you identify those companies.

Happy Halal Investing.