3 filters which investors should not avoid while selecting a stock for portfolio

It has always a controversial issue over scrutinization of stocks before adding them in portfolio. No matter which kind of investor you are, which salary class you belong and which ideology provided by market pundits you are banking upon you will always filter the stocks through many funnels before investing into. Phases of investment have changed a lot as the old school of investing have favored for value investing while new school of thought is inclined towards growth stories. But, history has always rewarded only those investors who have relied upon their own thorough analysis rather than following the tips and consultations from market veterans. Equity markets have always demonstrated that an investor cannot turn the table in times when economies are fighting with systematic risk as the concept of diversification get handcuffed and portfolios turn deep red. While, stocks with three important filters discussed below claims to nosedive less during weakness and reverse faster after stagnation.

Following are the filters which must be kept in mind before investing in a stock:

Penetration of the Market: The unconventional school of investing has always favored for growth stocks and growth of a company is inversely proportional to penetration of the market. Less penetrated market have large room to explore themselves and add more potential customers into their total clientage while highly penetrated markets provides less opportunity for companies to explore. Investors should prefer those stocks which have operations in less penetrated markets as their potential has not unlocked yet due to uncatered customer base.

High Entry Barriers:  Whether the orthodox or unconventional school of thought, it is always advisable to enter into those companies whose market have high entry barriers. It is beneficial to buy stocks which are operating in blue ocean (product with high entry barriers) as these companies have more control over pricing while the companies having operations in red ocean market (product with low entry barriers) witnessed blood on the roads due to less or no control over pricing so they requires to spend on advertising and sales promotion to keep up their sales. Moreover, these companies never enjoys high premium due to easy availability of their product unless they form a cartel.

High dependency on debt funds:

The acquisition channel of funds for augmenting the working capital requirements or investment for expansion in business has always been controversial as fund raising from debt market slices the earning per share but raise concerns for equity shareholders due to more exposure. There is no denying the fact that inculcation of debt component into capital mix brings tax benefits on interest obligations. While, history has seen favoring companies which are debt-free due to no cost in times of recession/depression.

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