Selection of the Stock

 What is Equity?

In finance in general, you can think of equity as one’s degree ownership in any asset after all debts associated with that asset are paid off. For example, a house with no outstanding debt is considered entirely the owner's equity because he or she can readily sell the item for cash, and pocket the resultant sum. Stocks are equity because they represent ownership in a firm, though ownership of shares in a public company generally does not come with accompanying liabilities.

How to Select an Equity Stock?

With so many options, selecting stocks can be a challenge for the average investor. While each individual's goals may alter their investing framework, having a clear set of rules can help. The following are six basic rules to consider:

Invest in stocks that offer an easy-to-understand, fairly straightforward company business model. Examples of this rule include Infosys, TCS, and CCD etc. If you happen to have or understand specific industry knowledge about a company that other investors might find complicated these stocks are also worth a look for your investing universe.

Invest only in companies that are "best in breed." This includes companies that have tremendously-established brands or that have extremely strong emerging brands. This is key. Furthermore, if you look at many of the best performing stocks in history, all have one thing in common - a tremendous brand. Example of this rule includes, Britannia, Colgate, ITC, Coco-Cola, Nestle India and so on.

While the old investing axiom, "past results do not guarantee future performance" is true - and frequently repeated - it is also misleading. In order for a stock to meet the criteria of this investing strategy, it has to be a strong past performer. It doesn't have to be up over the last year or even a couple of years, but the long-term chart has to be compelling. Ask yourself the following: do you want to invest in a business, brand, and management team that has destroyed shareholder value over the long-term, or the one that has made shareholders rich? The answer is obvious. Simply put; buy stocks that fit the above metrics and that have performed well over a substantial period of time. If you are screening for tremendously-established brands as well as rapidly-emerging brands, this shouldn't be a problem. Most companies that fit this profile have a great long-term track record of creating shareholder value.

Invest in mid-cap and large-cap companies and try to avoid small-cap names. This isn't an edict, as there are some great small companies that would fit into this investing framework, but make sure that most of your picks conform to this advice. Like many of the tips provided here, it is from the Benjamin Graham and Buffett school of thought. Furthermore, if you are investing in "best of breed" companies and preeminent brands, following this rule shouldn't be a problem.

Try to focus on companies that pay out dividends. Again, this is not an edict. The recommended stock provided in the follow up article, for example, does not pay a dividend. As a rule; just make sure that a majority of your portfolio's companies pay out a quarterly dividend. Examples of great dividend stocks that would fit this framework include HPCL, BPCL, Coal India and so on.

Ideally, you want to buy stocks that fit this framework either on significant market pullbacks or when the stock is breaking out from a large consolidation area or base. The idea of buying on breakouts from large basing areas comes from legendary investor and founder of Investor's Business Daily William O'Neill's CAN SLIM strategy. In particular, look for this pattern with emerging brand stocks and try to buy the more established companies as cheap as possible to hold onto for the long haul.