Becoming an Informed Investor – Due Diligence
"Invest in XYZ, it will double in a month!" - You hear this at tea stalls and WhatsApp groups. An Informed Investor ignores noise and relies on Due Diligence.
What is Due Diligence?
It implies "Doing your Homework" before buying. It is the investigation of a potential investment to verify facts.
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Sources of Information (Where to look?)
- Annual Report: The Bible of the company. Available on company website.
- Look for: Chairman's message, Future plans, Risky factors.
- Stock Exchanges (BSE/NSE): Formal announcements (Results, Dividends).
- Screener Websites: Screener.in, Moneycontrol (for quick ratios summary).
- Concall Transcripts: Record of Q&A between Management and Analysts.
Red Flags (Warning Signs) 🚩
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Case Study: The "Tips" Trap
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Key Ratios to Check
Before buying a stock, check these 3 numbers:
- P/E Ratio (Price to Earnings): Is it expensive? (Lower is often better).
- ROE (Return on Equity): How efficient is it? (Should be > 15%).
- Debt-to-Equity: Is it drowning in loans? (Should be < 1).
Summary
- DYOR: Do Your Own Research.
- Ignore Noise: Tips, News, and Rumors are noise. Financials are facts.
- Read: Even 10 minutes of reading about a company can save you from a bad investment.
- Circle of Competence: Invest in businesses you understand (e.g., if you are a doctor, analyze Pharma stocks).
Quiz Time! 🎯
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Next Chapter: Demat Accounts! 📂