If you are a day trader, you would know there is a wide range of equities to pick from, and you can choose virtually any kind of stock you desire. Hence, the first rule for intraday trading is to understand what to trade. It is critical to know the basics before money into stocks with reputed brokers such as Kotak Securities. Once you have made up your mind on the type of shares you need to invest in, the next step is to understand how you can profit from them.
Here are six factors you can consider before choosing stocks for intraday trading
1. Nature of business and its prospects – Scanning through past financial track records of the company that you are interested in investing can help in knowing the true nature of the business. You may also want to consider current policies and projects involved in the company that can act as value generators for the future. Based on the current industry outlook, you may want to make your final investment decisions.
Experts recommend looking into the long-term value of the stock rather than chasing stocks that display multi-bagger returns in a short time. Doing adequate research before undertaking intraday trading can ensure a wise decision. One of the critical intraday trading strategies involves checking and ensuring the valuation multiple of the company’s stock is still appealing and not a deviation compared to its own past or current valuation multiples.
2. Profit-generating business model – A prime factor to consider is to look into the uniqueness of the business model of the stock you are considering to invest. In addition, you may also want to find a stock based on minor cyclicality coupled with a broadened business base.
3. Generating yields – A solid understanding of the company’s top line, bottom line and debt load is imperative before investing in it. It can be a good idea to also go through the earning reports of the company that are issued every quarter and annually. In addition, consider looking into the long-term view of the market before making a decision.
4. Management quality – Getting a view on the management quality of the company is a must. If you are unable to get a good understanding of the management, look into tried and tested companies with a robust rather than purchasing stocks of companies that have unknown managements, mainly if the valuation is very high.
5. Debt to equity ratio – This is a critical ratio in understanding the amount of debt a company carries as against its shareholder figures. Typically, a low debt to equity ratio of the company in comparison to the industry average can be considered a substantial investment.
6. Valuation – A critical metric to understand if the stock is expensive, appealing or satisfactory is to assess its valuation. Organizations are calibrated against one another based on the valuation ratio to know if it is overvalued or undervalued. The typical ratio used in this regard is P/E (price/earnings). If you are considering picking a bank stock for intraday trading, you may want to use the P/B [Price-to-Book] ratio. On the other hand, a capital-intensive company can be valued using EV/EBITDA.
Conclusion
One of the best intraday trading techniques is to invest in stocks without paying attention to speculative information or rumors. Rushing to buy a stock based on market buzz without adequately looking into the company’s valuation can be a grave mistake. This is because once you execute the day trade, it cannot be reversed and hence, it can be advisable to let go of opportunities rather than burning your savings.