How to choose best stock for long term 6 Methods

 How to choose best stock for long term 

Everyone invests in the stock market to earn some good amount of profit in the long term or even short term. But, as the world has witnessed, 90% of the people lose money in the stock market. Why?? 

Because they actually don't know How to choose the best stock for Investment. There are many fundamentals you can go through based on your analysis but the best way is to pick a good stock and just hold it for at least 10 years. Now, How to choose the best stock for the long term?? 

One popular way of choosing the best stock is to define some Competitive advantage(also known as MOATS) in the company you are researching. Competitive advantage basically means some special feature or any unique characteristic in a company which differentiates it from other stocks. 

Here are the 6 top Moats for choosing the best stock to invest:- 

1. Government protection

2. Low cost 

3. Distribution reach

4. Brand

5. Patent

6. Switching cost 

Let us start with the first one....

1) Government protection-- There are some companies which the government is protecting legally from outer competition. It's because they work in a specialized field for which the government has issued the order of pursuing a license from it. Credit rating companies are one such example of Government protection.

It is mandatory for a new credit rating company to acquire a license from the government and it is very difficult because the government doesn't give a license to anyone randomly. Other industries falling in this category are explosive bomb factories which are protected by the govt as they need a license. 

These companies face almost zero competition as only a few entities have managed to get the license. So, if you are looking for the best stock to invest in the Indian market, then definitely consider this MOAT. 

2) Low cost- Simple meaning, a company that incurs very low cost in production as compared to peers. For example, take cement companies. The most important raw material required for it is limestone and if the company already has access to a cheap limestone mine. In that scenario, the company will incur low production cost as compared to your competitors of the same industry. Contrary to the low cost, it can also sell the final product to customers at a low price to attract mass public. 

3) Distribution reach- A new company cannot supply its product to the entire country and in each household. Company able to do this, has the advantage of distribution reach. A company making its product available to every house of the country definitely has an edge over peers. 

For example, Hindustan Unilever is a daddy company that has made its products available in almost every street of the country. Though their products are used in every section of the society as they are easily accessible. So, for a new FMCG company which enters the market even with better products than HUL, it's almost impossible to reach that level of consumers. Finding this kind of Moat will also help you choose the best stock for Investment. 

4) Brand- Brand is clearly a popular product whose name is known to a little kid too, like Maggie. A loss making company can even sustain in the market it has goodwill through a single brand also. It has the option of launching its new products under the name of that popular brand. 

Let us take an example of Marico which is a FMCG company. Marico was loss making in the initial phase but it had the brand named Parachute (Coconut oil), as we all know, it's a common household name. Parachute compensated its day to day operations as the other products were a failure in the market. So, Marico started launching products directly under Parachute. 

5) Patent- You developed a product and you patented it from the government. Now, nobody in the whole world can make the same product as yours without your agreement. The IT and Pharma sectors are pretty much used to this Moat. Whenever they produce a new product they patent it and gain the licence over it. It allows the company to have a unique product which directly increases their profitability.  

TRIVIA- You must have observed that no matter how slim the android phones have become, none of them are allowed to keep bezzleless bottom. Apple, at the time of iPhone 11 patented the technology used for curving the glasses to cut the edges. 

6) Switching cost- What if I tell you to keep changing your bank accounts for any random reason? You'll call me a fool and will ignore my advice. You know, HDFC and SBI have the biggest customer base as they pay the least rate of interest on deposits. So, why don't the customers switch their account to some other bank? Because the switching cost in terms of every aspect in banks is very complicated. People prefer to keep their money safe first instead of running for better interests. Switching to a different bank account is a lengthy process and we all like to avoid it. 

Even the IT companies work on the same softwares for years because of the high switching costs. 

So, a company having this kind of Moat can also be worth investing in and best stock for the long term. 

Above were the 6 top competitive advantages you should identify in a company in the process of analysis. I hope you all have got a basic answer of How to choose the best stock for Investment? 

How did you like our information, please tell us, the information given on this blog is part of our research, we do not guarantee that this information is completely correct,That is why readers should work with their discretion, for any kind of complaint, you can tell us on the comment box or contact us in it.