There are several signs to look for when determining whether a smaller stock will be a good investment. The first sign is based purely on whether other people trade the stock; this is trading volume. What’s that? Volume is simply a count of how many shares of stock have been traded in
a given amount of time. Don’t concern yourself too much with the definition; it’s really very easy. If we take a look at a stock quote, we will often see the word volume followed by some number. Look up Yes Bank and locate the volume. It will be a big number, like 8,51,10,403. No special understanding of this number is necessary; it is just how many shares of the stock have been traded that day. Why do we care about volume? Well, we care for two major reasons. First of all, it tells us something about the popularity of a particular stock. If we return to our Yes Bank example, 8,51,10,403 shares is a lot. Every day, hundreds of thousands of people buy and sell Yes Bank’s stock. Let’s pretend that the average person trading Yes Bank stock buys or sells 100 shares (we don’t know the actual information). This would mean that about 8,51,104 people bought or sold Yes Bank stock that day. This should shed some light on why stocks like Yes Bank are often referred to as widely held stocks and should help you see how volume helps us make a judgment about the popularity of any given stock. The second reason we like to look at volume is to determine liquidity. This is just a fancy way of saying there are buyers and sellers for the stock. If a market is “liquid,” I will be able to buy and sell my stock around its trading price without much trouble. If not, I may have to settle for a price drastically different from the price of the last trade.
In addition to looking at volume, being informed about the company’s business is important. Some hard-core technical investors may tell you otherwise, but, in the long run, a company’s sector and style of business determine much of its success or failure. When researching lower-priced stocks, try to look for something unique or innovative about the company’s products or services. Does the company manufacture a product that nobody else makes? Does it consistently make improvements that can help it maintain an edge in its field? Sometimes just the fact that a company is doing research and development in emerging technologies can make it attractive. One caveat, however—try not to get caught up in the hype. If you haven’t found a company on your own, chances are that its price has already been somewhat inflated. Your friend or stockbroker who told you about the symbol most likely has already invested in it as well. If you haven’t found the stock through your own research, it’s better to consider yourself the last person to have heard about it.
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