Eight golden rule, which every investor should follow before taking an investment decision in a company.

When I decide to buy stock, a common question rise in my mind, Is buying this stock is worthwhile?  Often such questions tend to tighten investors. Getting answer such questions are not less than solving a puzzle.

An attentive investor must follow stock investing as if they are attempting to solve a puzzle.

As an investor, if I want consistent return from the Indian equity market then I must choose fundamentally strong stock for investing.

Here’s eight golden rules that investors should follow

1. Choose a fundamentally strong company for investment.

To find a fundamentally strong company, we can filter out healthy companies using two-minute drill so that further investigation can be done. In a two minute drill, we assess the company's seven financial ratios and its tendency. Every investor should know about these eight financial ratio analysis. Every investor should look these points very carefully.

• Earning per share (EPS)- Should be growing in last five years.
• PE ratio – Should be low in compared to companies in same industries.
• Debt to equity ratio – We want to invest such a company who has zero debt and we can find out this by looking at debt to equity ratio. Debt to equity ratio must be less than 1.
• Return on equity - Return on equity for a company must be above 20%, Because we want to see our wealth growing continuously.
• Current Ratio – it must be greater than 1.
• Dividend Yield – If a company distribute dividend among investors it’s a clear sign that company has free cash. Dividend yield for a company should growing in last five years.
• Management – Company’s management should loyal and honest.

When we are convinced by eight financial analyses that the company meets the criteria mentioned above, then we will study the company's financial report. Read financial reports (Profit Loss Statement, Balance Seat and Cash Flow Statement). If a company pass the 2 min drill than we can forward our study further.

2. Understand company’s business.

In this point of section we’ll try to understand, Does company have easy business model or not? This is important because if you understand the business of the company, then you can take wise decision to buy or sell stocks. Therefore, invest in companies whose business you understand properly. There are some popular companies who have simple business model HUL, Colgate, Britannia Industries, ITC  and many more.

3. Understand company’s life cycle.

In this next step we try to find how long a company’s business life cycle. Always invest in a company who is involved in his respective business more than 20 years. Such companies have greater development potential and power of compounding is also applicable to such companies. Try to find, are people using company’s product over the last 20 years. If company’s product is very popular among his customer then it’s a good choice for investment.

4. Check the company's debt.

The debt on the company is like a big hole in a boat. If the hole of the boat is not filled quickly, then it will not be able to cross the long sea and will surely be submerged. When you select a stock for investing in Indian equity market then read the financial statement of a company very carefully. Avoid such a company who have big debt burden. Many times the accountants use financial shortcomings to hide the debt in their annual results.

5. Track previous record of Management.

Management is the soul of a company. A good management can take a company on a growth path. On the other hand, a bad management can be the reason of company’s fall. Therefore, if you choose a company for investment then his management analysis is important. Firstly, find in which person’s surveillance the management team is working, also find does the management has good track record in past.

This is required because many investors ignore to check the management of a company.

6. Check what company currently doing ?

See what the company is doing, which is not competitive. To understand this properly lets analysed automobile sector. When we consider passenger vehicles, Maruti Suzuki is a leading company in India. There are many competitors against Maruti Suzuki  in this area like Tata Motors, Honda, Ford etc. Still, Maruti Suzuki is dominated by the ease of available services. Therefore, Maruti Suzuki’s maintain his sales growth consistently and also give good return to his shareholders. I mean to that first check what the company is doing that his competitors not doing.

7. Check company’s popularity.

The stock market is based on people's feelings. Persistent news influences the public's expectations and decisions. Stocks, which are popular in the news, can be inflated by media promotion. Since people expect good results from such companies, even after giving good returns, the share of such companies falls. This is the reason why try to avoid buying such companies' shares for easy returns. Hot stock is under market volatility and boring stocks are one, which gives best returns.

8. The company has durable products.

When selecting a company, see that he has a low cost durable product. Like Colgate, it has become a common name in Indian homes that Colgate is considered as a substitute for toothpaste. Like Cadbury, a chocolate manufacturer. This company dominates its industry and people are also ready to pay more to buy their product. Similarly, the Tata Motors truck has become moat in the area. Tata Motors has been dominating in the automobile sector for over the past five decades. This is the principle of the ‘Moat.’ Should choose companies share with Mot product. Companies like Coal India, Asian Pants, ITC are some of the big companies with big Moat.

That’s all, as a smart and sensible investor, the big idea is that you must try to seek out business that will give you joy to own and live with for the next 15-20 years.

As Warren Buffett says so often, “If a business does well, the stock eventually follows.”

So, if you understand the company’s business deeply, your returns are guaranteed.

Let me know in the comment section below, if my this post helps to take your investment decision wisely.