6 Questions To Ask Before You Buy Shares Of A Company In India

Share prices in India have become expensive in the last one year. Many analysts believe that share prices in India are overvalued at the current levels as earnings growth has not caught up with the rally of the last one year. This makes it important to look for companies that still have value and for this you need to ask certain questions.

1) Are you buying shares that have many regulatory hurdles?

Some of us like telecom stocks, but, you cannot be sure if there would be regulatory hurdles from the TRAI. In the past it has happened, which is why some investors are wary of buying these stocks. For example, the FMCG business has minimal regulatory interferences and is a preferred destination for investors.

Another example is pharma shares which have been a favorite of investors, but, lately they have been hit by regulatory hurdles from the US FDA. So, watch out for overly regulated industries.

2) Why shareholding pattern of the company is important?

Companies on their website every quarter declare their shareholdings. Look if the large shareholders are foreign portfolio investors and institutions like mutual funds and LIC. If holding of these investors is high it means the credibility of the company could be pretty good. Shares of companies like HDFC Bank, Axis Bank have a high holding of FPI and domestic institutions.

3) Has the promoter holding pattern undergone a change?

Look to see if the promoters have been selling shares every quarter and their shareholdings in the company has come down. This would not be a good sign. Look if the shareholding has gone up which is certainly good news.

4) Has the promoter pledged his shares?

Look to see if the promoter has pledged his shares for a loan. These details are also easily available on the company's website. If it is so, than it is not a good sign. You might want to refrain from buying shares of such a company.

5) Are you buying based on rumor?

Make sure you are not buying the shares based on rumor. This can be highly dangerous and an event based risk.

6) Are you buying the shares for investing or speculating?

If you are buying shares merely from a short term perspective to make quick money, it may not be a good idea to dabble in shares. Look for making money over the long term and hang-on to your shares after buying good quality shares. Warren Buffet has been successful in doing that and there is no reason why you cannot.

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