4 Common Types of Stocks That You should Avoid Investing In
Stock
investing requires a lot of discipline. There are thousands of stocks listed
stock exchanges, and all you need to find is 10-15 good stocks to invest. For
the remaining, you just need to say ‘NO’.
In
this post, we are going to discuss four specific types of stocks that you
should avoid investing in. However, before we discuss these four kinds, let’s
first learn the most generic rule of stocks that you should avoid investing.
“The difference between successful
people and really successful people is that really successful people say no to
almost everything.” -Warren Buffett
Stocks that you should avoid investing in:
As an
elementary rule, avoid investing in companies that you do not understand. If
you can’t figure out how the company is generating its revenue, what is the
company’s business model, what are the products/services offered by the company
or what is the use of the products- avoid investing in that company?
For
example, if you have zero knowledge of semiconductors or microelectronics, and
don’t understand the use of Zener diodes, MOSFETs, Amplifiers, etc. Then
avoid investing in semiconductor companies that manufacture these products.
There’s no way that you can understand the market demand, product quality,
future prospects or even the competitors.
Instead,
invest in industries that you may understand like banking, FMCG, automobiles,
etc.
4 Common Types of Stocks That You should Avoid Investing In
Here
are four mainstream kinds of stocks that you should avoid investing to
safeguard your returns-
1. High debt companies:
Debts in the companies are like big
holes in a ship. Until and unless, these holes are filled- the ship cannot go
far. Avoid investing in companies with a lot of debt.
As a
thumb rule, keep away from companies with a debt/equity ratio greater than 1.
2. Low liquid Companies:
There
are some stocks whose prices may be continuously falling, but the investors are
not able to sell that share just because there are no buyers. Exiting from a
low-liquid company can be pretty stressful. Avoid investing in companies with
low liquidity.
In
general, stay away from companies with the daily average trading volume of
fewer than ten lacks. The higher the volume, the better it is.
Way to
check the liquidity of a company is by noticing the difference between Ask/Bid prices.
The smaller the difference, the higher is the liquidity.
3. Falling knife category companies:
Investing
in companies whose share price are falling continuously and significantly (for
example- Geetanjali gems, PC Jewellers, PNB, Suzlon energy etc.) is never a
good idea. There’s always a reason why the prices of these stocks are falling,
and the market is punishing that company.
Moreover,
there are thousands of listed companies in the Indian stock market which you
can explore. Trying to catch a falling knife generally results in hurting your
own hand if you are not trained on how to do so.
4. Low visibility companies:
There
are few companies in the Indian market whose information is not easily (and
transparently) available on the internet or financial websites. This is mostly
in the case of small and micro-cap companies.
Researching
such companies with low visibility can be a tedious job for the investors.
Further, there are also chances of information manipulation if you can’t
cross-check the data or when the reference sources are not reliable. Hence,
avoid the companies which are less visible.
