It’s a dilemma that anybody who is new to the stock market is bound to face. You have X amount of capital. You have neither the time nor the understanding of trading yet you want to grow your wealth. So, you want to invest for a longer time-frame and grow your money. But then, how do you start your investment journey? How to choose the right companies to invest in?
Here are a few things you should do.
Do your research. Make a list of top-performing companies as per the market cap. Have the names ready. Once you have chosen the top 500 companies, open your trading software. Choose the monthly time frame of the company you have selected. Start from the date of inception of the company. If the data is not available from the date of inception, don’t worry. Start with what you have.
Calculating and understanding the Compound Annual Growth Rate (CAGR) is crucial for assessing the performance of different companies before making investment decisions. Note the date of inception and the stock price of the company that you have chosen on that day. Make a note of it. Then from that day, look at the price of the stock after 10 years. And calculate the CAGR. Do this calculation for every 10 years.
Sounds complicated? Let’s understand this with an example. We will take 2 companies: ABC industries and XYZ Pharmaceuticals. The date of inception of ABC Industries is Jan 84 and rate was Rs.10.14. Note it down. Then note down the rate after 10 years and then calculate the CAGR. Do the same for the 20th as well as the 30th year.
Take a look at the above table. ABC Industries have been performing consistently over a 30 year period. You will notice that the CAGR increased in the first 20 years and on the 30th year, it has remained constant. This is a sign of a good company. In the case of XYZ Pharma, the CAGR of the company has been reducing consistently. That is not a good sign for an investor.
If you compare the CAGRs of these two companies. Which company looks promising? ABC industries, right?
So, what can you conclude? Consistent CAGR over a period is often preferable to sporadic or erratic growth. This indicates a more stable and reliable performance.
Compare the CAGRs of different companies within the same industry. This helps in identifying companies that consistently outperform their peers. Doing this comparison will bring more clarity to your decisions.
At ABJ Finstocks, this is the level at which we get into analysing the companies before we invest in them.
So, the next time you want to make an informed decision about investing in stocks, take the CAGR route. It will go a long way in helping you make the right decision.
There is a another way you can invest in the stock market, ABJ Finstocks will guide you in the stock research. ABJ Finstocks is a Best SEBI Registered Research Analyst in India. Our Stock Advisor will suggest you the best equity options for you.