InvestorQ : What are the questions that I must ask as a trader or investor?
Mahima Roy made post

What are the questions that I must ask as a trader or investor?

Dilmini Mercia answered.
3 years ago

Firstly, ask why should I not make the best of a bargain sale? Remember good stocks are better when they are available cheap in a panic. You don’t worry about overall markets and technical levels at that point of time. Eventually stocks find their equilibrium. When you ask this question, you do not miss an opportunity. We all buy furniture and clothes at discounts but we shop for stocks like we have been shopping at Gucci all our lives.

If the company is so great, why is the valuation so bad? Remember, company managements and financial statements can conceal more than they reveal. The market is always smarter than all traders put together. If the market is giving an indication, asking this question can save you the blushes. You may look silly but this silly question can save a lot of trouble. When DHFL was cracking, a simple question would be, why is the bond spread so wide? That would have given a clear indication which way the equities are headed.

Thirdly, why are institutions not buying into this stock? This is a question every investor must ask, especially if major shareholders are body corporates and individuals. Institutions are disinterested in a stock if there is a problem of entry barriers, management quality or future cash flows. It throws up insights. Agreed, that institutions have constraints in terms of size and liquidity, but if institutions are consciously avoiding the stock there are some serious questions to ask.

This is a very fundamental question. Why does HDFC Bank quote at a P/BV of 6 but ICICI and Axis Bank at less than 2. This is a clear pointer that something underlying difference. Why is the stock at a discount to competition? This question throws up a lot of key insights. A bank may get a P/E of 10 and another bank may get a P/E of 20. The difference is hard to explain. It could pertain to quality of assets, quality of earnings, cyclicality of business, cost of funds etc. Never miss this query.

Always keep asking questions about your profits. Why should you hold and why you should not exit. If I am making a neat profit, why should I hold on? There can be two answers to this question. You have caught the right stock at the right time. As well make the most of it. Alternatively, you have made your money and it is smart enough to exit. Either ways, asking this question making the task easier.

Last, but not the least, ask questions to your broker / advisor. Remember, you as an investor need to be convinced about the logic of any investment decision. Ask for a research report. Ask for the financials. Check out what other brokers are saying. Keep a tab on any negative media reports. You are entitled to ask questions and they will have to answer. You must really talk out the smallest things with your advisor or the RM who is mapped to you.