How to find good companies as there are many publicly listed companies in the Indian stock market?

Short Answer

To find good companies out of the thousand companies listen on the Indian stock exchange, you can filter stocks on the basis of certain parameters such as Market cap, Debt to Equity, Dividend payouts, Revenue and Profits growth, etc. You can easily use an online stock screener to find out these stocks.

Detailed Answer

What is the definition of a good company?

There are more than 7,000 companies listed on the Indian stock markets, including the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE). Not all companies listed on the stock exchange are good or could be considered for investment. Some hundreds of companies have a market cap of less than 50 crore rupees, which is extremely risky and illiquid. These stocks definitely don’t come under the category of ‘good.’

Similarly, a good company should possess certain characteristics such as stable earnings, increasing revenues and EBITDA, good management, and increasing the market share of its products.

How to find good companies in the Indian stock market?

How that you know what is a good company, let's know how to discover such companies.

Among the several thousand companies listed on the Indian stock exchange, only a few hundred are considered as blue chips, the remaining are categorized as Mid and Small caps. They are segregated in terms of market capitalization.

The largest 50 companies in terms of market cap are taken under the Nifty 50 index. This index has a total of 50 stocks from nearly all sectors, which provides a brief overview of the Indian economy.

If you are looking to invest in the top 50 or 100 companies in the Indian stock market, your work is already done. The Nifty 50 index and the Nifty 100 index comprise stocks, that are ranked in the top 100 companies in India.

To find out the remaining good companies, you can use any online screeners. Some of the most popular screening platforms are Screener. In, Investello, Tickertape, MoneyControl, Tradingview, etc. Using these you can enter your own filters, based on which you will get a list of stocks that fulfill all your requirements.

Over here are some of the basic filters which you can use to screen stocks:

  • Market Cap: More than Rs 5,000 crore
  • Debt to Equity: Less than 4
  • Earnings Per Share: 1-3 year historic Earning per Share, More than 10
  • Return on Equity: More than 15.

These were some of the sample filters which you can use to get good quality stocks.

Some key elements to remember when finding good quality stocks are

1. The Profits and Revenues should be increasing on a regular basis.

2. The company should have low debts, or the debt to equity should be low, ideally less than 4.

3. The Promoter holdings should be good. This depicts that the management has skin in the game and has the motivation to expand the company.

4. The stock should not have a high Beta, this means it should not be extremely volatile.

5. The stock should have a good dividend payout history, as stable companies generally pay regular dividends to their shareholders.

Bottom Line

These were just some of the parameters to look for good-quality stocks. This is by no means a rule that has to be followed. You can always play around with the numbers to get better results. You can also use the Nifty Mid-cap 100 and Nifty Smallcap 100 index to get the top 100 small and mid-cap stocks.

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