How to Identify Bad Stocks?

Introduction -

In this article, we will learn about that how to identify bad stocks. In order to invest in stocks, one needs to have the necessary knowledge regarding the best amount to put into the market. There is a chance of risk in the Stock Market, so it is essential to understand the best time to make a decision about investing in the market. You must be aware that if you make wrong decisions, you will suffer a massive loss which would mean you lose the entire amount that you invested. If you think that you're able to take the risk in the market, then you can make a profitable investment. It is essential to make the correct decision for him or herself and make sure that they get the appropriate amount of money invested at the right moment.

Here are Some Points on How to Identify Bad Stocks?

1. High Debt to Equity Ratio
2. Less Promoters Holdings
3. Low ROE(Return on Equity
4. Decreasing Profits
5. High P/E
6. Decreasing EPS(Earning per Share)

1. High Debt to Equity Ratio -

Businesses take loans for various reasons similar to everyone else, they must pay interest on the money. Companies with a high amount of debt may lose a substantial amount of their revenue, which in turn can impact their profits.

If revenue declines during the time or when a market is downstream can threaten the entire company and the price of the stock could fall. Beware of stocks with high Debt.

2. Less Promoters Holdings -

Beware of stocks with less promoters holdings. A Company has investors and plays a significant role in the development of the company through having significant stakes in the company.

3. Low ROE(Return on Equity) -

An increasing and sustainable ROE over time may indicate that an organization is in profit to increase shareholder value as it has the ability to reinvest its earnings in a wise manner, in order to boost the profitability and productivity of the company. Therefore, the ROE for the Company should be very high. Do not invest in stocks with low ROE.

ROE is calculated by:

ROE = Net Income / Shareholders' Equity

4. Decreasing Profits -

Less revenue means you earn less profit. A decrease in revenue could result from either a decrease in customers or price reductions. Avoid stocks that have a continuous Decreasing profit

5. High P/E -

The Price Earnings Ratio (P/E Ratio) is the relation between the company's Stocks and earnings per share (EPS). It is a favored ratio that provides investors with a better idea of the value of the company. The P/E ratio shows the expectations of the market and is the price you must pay per unit of current earnings

6. Decreasing EPS(Earning per Share) - 

Earnings per Share (EPS) is the primary measurement used to calculate the proportion of common shareholders' share of the profit of the company. EPS determines the profit distribution of each common share relative to the company's overall profit.

Conclusions 

Hope this article will help you how to identify bad stocks. Identifying the bad stock to avoid is an art. If you want to invest in the stock market then you must have to best Demat account and Trading account to trade. Visit us to open Demat account in Zerodha, Upstox, 5Paisa, etc. Also, Is there any topic you want a blog on or do you have any queries related to this blog? please comment below and reach out to us.