When investing in the stock market, besides deciding which stocks to buy one also has to choose which ones should be avoided. Some stocks may appear attractive, but they are volatile. Before you invest in stocks, there are numerous things to think about. In this article, we investigate some of the more important points about risk and pitfalls with stocks.
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Steps to Avoiding a Loss in the Stock Market
1. High debt levels
The amount of debt a company is carrying is one of the red flags you can check. The ability to pay debts can be gauged by the area’s debt-to-equity ratio, interest coverage ratio and overall level of debt.
2. Companies in stagnant markets
Unless these companies are industry leaders and can either change the image or reinvent their products and/or services, there is little to no hope of growth prospects in such companies.
3. Overvalued stocks
If the stock is overvalued, there is always a change of price correction. Therefore, take the time to do a comprehensive fundamental analysis and a technical analysis of the stocks.. Check aspects like PE ratio, price-to-sales ratio and other relevant indicators.
4. Stocks of loss making companies
Examine the companies’ earnings and their results. Shares of a company that is not doing well or is on the verge of bankruptcy should always be given a wide berth.
5. Stocks whose public holdings are more than promoters’ holdings
If the public holdings are more than promoters holdings of a company, the stock of such a company might experience high volatility- hence you should avoid such a stock. You can analyse the stocks using a stock screener tool.
6. Hot Stocks
Of course you often get ‘stock tips’ from the Internet or YouTube. But they are hard to trust, because sometimes it can be a strategy of big players to dump their holdings. But if you invest in such companies, make sure to do your own research.
Conclusion
The stock market is so volatile that it’s always a good idea to do fundamental analysis of stocks before buying them. Understanding the historical and current data of a company will assist in making sound investing decisions. Keep in mind, the stock market is a complex beast; you will be well rewarded for researching carefully and being thoroughly disciplined.
