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The second important criteria is Earnings Per Share (EPS). EPS is nothing but the earnings of a company over a year divided by the total number of shares outstanding. The higher the EPS, the wider is the grin on an investors face.

The third is Price/Equity Ratio (P/E). EPS alone means absolutely nothing. In order to get a sense of how expensive or cheap a stock is, investors look at earnings relative to the stock price. To do this, most investors employ the price/earnings (P/E) ratio. The P/E ratio takes the stock price and divides it by the EPS. This P/E ratio is then compared to the P/Es of other companies in the same sector to get an idea of how the company is valued as opposed to its peers.

Another criteria for stock selection is the Market Capitalization, which is the total number of shares multiplied by the present value of the stock. On the basis of Market Capitalization, classification can be made in terms of the size of the company (small cap, mid cap, large cap, nano cap, etc.). Some investors use this classification to base their buying decisions.

Dividend Yield is another criteria Income Investors lay a lot of stress on. It is the ratio of a company's annual cash dividends divided by its current stock price expressed in the form of a percentage. Many investors prefer to invest in non-volatile companies with assured dividends.

Then there are other criteria like beta, revenue, sales, volume, management of the company and shareholding pattern which need no explanation.

A very important and significant factor is the nature of business of the company. In case of a manufacturing company, capacity utilization, cost of the product relative to the peers and correlation of the stock to stocks in other sectors also play a major role in the investment decision. Especially if the investor want to diversify his portfolio in, the lower the correlation of securities in the portfolio, the less risky the portfolio would be. This is true regardless of how risky the stocks of the portfolio are when analyzed in isolation.

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* Contributed by -
Nidhi Sharma,
MBA (Global), Batch 2005-07,
IMT, Nagpur.