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From 28th Nov,2010, We have experienced a bearish trend in DSE and CSE Stock market. We have to absorb 5 to 6% index fall in one trading day. Those who are new in the market and those who have very little knowledge about the market trend were in a fix. Some went to the street, agitated, blocked the road and threw stone and bricks to the DSE building. Some investors started panic sell, After one hour, index again starts to move up and closes 1 to 2 % high.

Every market has its own trend. Sometimes it go up, sometimes down. There are also big investors, gamblers insiders who control the market. Small investors are the worst sufferer of their activities. We have to remember that market will not always rise and also not always fall. So, we have to take some defensive strategy to protect our capital and make profit. Defensive stock selection strategy can help us to avoid capital loss and ensure gain.

1. Annual sales:
A smaller company generally fluctuates in earnings. A medium or large enterprise shows consistency in earning. A company that have  tk 100 crore  or more of annual sales  is considered to be a consistent company. During the inflation, it may be double.

2. Strong Financial condition:
A company should have at least same amount of Reserve and surplus of its paid up capital. If the company has long term debt, it should not exceed its working capital. This consideration can be a strong safeguard against the possibility of being defaulter or bankrupt.

3. Stable earnings:
Investment in a company is considered to be safe if it has not a loss over the past 10 years. Companies that have stable earning are more safe. Capital gain should be deducted from its earning, otherwise it will give a false signal.

4. Earnings Growth
Earnings growth should be at least 25% than previous year. Also ten years track record should be considered.

5. Dividend Record:
A company should have a history of paying dividends of its common stock for at least past 10 years. This ensures the possibility of future dividends. The company that gives stock dividend (bonus share) regularly can be considered a better stock for more gain.

6. Price  Earnings Ratio:
The current price of a stock should not exceed twenty times of its average earnings  

7. Ratio of Price to Assets
As  a rule of thumb, the price of a stock should not exceed 15 times of its earnings and 1.5 times book value. For selling, we should only 9 times earnings and 2.5 times book value.

8, NPAT Growth:
Net profit after tax growth should be minimum 25% than previous year.

9. Return on equity (ROE) :  
It represents the percentage of earnings against the asset value of a stock. It can be calculated as:EPS/NAV*100 .
ROE greater than 20% can be considered to be a better stock

10. Is the company alleged for any irregularities?
A good company abides by the existing rules and regulations. A company having a bad reputation of financial irregularities may not be a good choice.

A good stock generally shows strength during bearish condition. It may goes down to 5-10% whereas a weak share may loose its price to 10-50%. Thus we can protect our capital and ensure profit.

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Very informative.

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THANKS FOR COMMENT

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Taj vai, great accumulated inforation. Really appriciating.

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Originally Posted by Dse Analyst:
Taj vai, great accumulated inforation. Really appriciating.

The earnings from the capital market is not so big in compaison of their regular income. It will not exceed 5-8% of their total income. Again the money will be back in stock market. So, We don't have to worry.

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Thanks Taj bhai !

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Originally Posted by Reefat Zaman Shourov:
Thanks Taj bhai !

WELCOME