Checklist before buying a scrip

This section includes a essential checklist that an investor should look in to before attempting a long term buy in order to ensure safety and descent returns on capital

The dictum in buying shares for long term investment is 

"GREAT COMPANIES AT GOOD PRICES"

Answer the following questions before buying a scrip!

Quality of the business

• Do you understand the kind of business the company is doing?
  
• Have you ever been to an outlet of the company (office, retail store etc.) ?
  
• Have you ever used a product the company sells?
  
• Is the company a consumer monopoly OR Is it the sort of a company you would first consider when you are planning to buy a product in its class?
  

Financial fundamentals

EPS 

• Is the EPS of the company consistently increasing over a period of at least 5 years?
  
• If yes what is the average yearly percentage rise in EPS over the last 5 years? 
  
• Is EPS/Share price an acceptable number in the context of valuing the company?
  

Valuation of a scrip

This section intends to help investors value a company so as to assess whether they are paying the right price for a stock

In contrast to a novice investor's thinking, the price of a share does not represent the actual value of a company. It represents, at every point of time, the market's shifting perception of a company's value. This perception being invariably clouded by the market emotions of greed and fear, rarely represent the actual value of a scrip.

The most important determinant of a company's value is its earnings. It is earnings, more than any other factor, that determines the direction of a company's share price in the long run. Earnings per share (EPS) therefore becomes one of the important parameters for an investor attempting to value a company. This EPS, in relation to the price of the scrip, gives the investor an idea of the price at which a scrip is worth buying.