What if I buy this stock today and the price crashes tomorrow?
This one thought, and suddenly people stop before even starting in the Stock Market. And honestly, it’s real. Buying a stock without checking the company is like lending money to a stranger, you don’t know if you’ll get it back.
That’s why checking a company properly is the most important step before putting in your hard-earned money.
Here are the 6 simple ways to do it, explained in easy words.
1. Understand the Business
First, ask: How does this company earn money?
A strong business sells products or services people actually need.
Example: Asian Paints makes money because people keep painting their homes and offices. Maruti earns because people keep buying cars. Simple.
If the business is easy to understand and useful in daily life, it’s safer to trust. If you don’t understand how the company earns, better skip it.
2. Check the Financial Health
Money tells the truth. A healthy company should make more money than it spends (source: Morningstar). To check this, see:
- Sell more every year (growing revenue)
- Actually make profit (not just big sales)
- Have limited loans (too much debt can kill a company)
📌 Example: Infosys made ₹26,233 crore profit in FY24 and has almost zero debt (Infosys Annual Report). That’s the sign of a financially strong company.
3. See the Industry Trend
Even the best company struggles if the industry is dying.
👉 Example: EV batteries are in demand because electric vehicles are growing. But companies making CDs or landline phones? Their time is gone. If more people want the product, the companies making it also grow. So always check if the sector has a future or not.
4. Judge the Management
Every company runs on its management team. Strong and honest leaders take the company forward. Weak or careless ones can make even big companies fail. (source: corporate governance insights at Zacks)
Take HDFC Bank, for example, it stayed trusted because its leaders were solid and clear. On the other hand, Kodak was once huge, but was late to go digital. Competitors like Sony and Canon took over, and Kodak went bankrupt in 2012.
So, how to check this:
- Watch what the leaders say in interviews or the news.
- Go through annual reports to see their plans.
- Make sure their actions match their words, results matter more than promises.
- Check their past work. Did they handle tough times well?
- Check if they own shares or get paid for performance, it shows they care about the company.
Tip: Don’t just listen to what they say, see what they actually do.
5. Compare with Others
Never see a company alone. Compare it with its competitors. This tells you if the company is ahead or behind its rivals.
Example: In Fast-Moving Consumer Goods (FMCG), Hindustan Unilever Limited (HUL) and ITC Limited are both big players. But if ITC’s profits grow faster than HUL’s, it simply means ITC is doing better at that time.
Market share is a simple check, the bigger it is, the stronger the company usually is.
6. Check the Price (Valuation)
Even a good company can be a bad buy if the stock is too high. One easy way to check is the P/E ratio (Price-to-Earnings), tells you how much you pay for every rupee the company earns.
- High P/E → stock is pricey
- Low P/E → stock is cheap (if the company is strong)
For example, imagine if a company is earning ₹10 per share but its stock is ₹500, its P/E ratio is way higher than similar companies at ₹200. Honestly, that stock looks too high to buy right now.
You can also look at P/B (Price-to-Book) and EV/EBITDA (Enterprise Value to Earnings Before Interest, Tax, Depreciation & Amortisation), sounding big and fancy? Don’t worry, they just tell you if the stock price is fair or too high compared to the company and its competitors. As Warren Buffett says, “Price is what you pay, value is what you get.”
Quick Recap
Before buying any stock, always check these 6 things:
- What the business does?
- If money is coming in and profits are real.
- Whether the industry has a future or not.
- Who is running the company?
- How it stands against competitors?
- If the price is fair.
For extra help, you can also see analyst ratings and insights.
Wrapping up
Investing is not gambling. It’s just checking things smartly and waiting patiently. It’s like opening a shop in a local market, you’d ask, “What will I sell? Will people buy it? How much will I earn? Is rent too high?” Same with stocks. Take 10 minutes to check all of these basics, and you’ll avoid the regret of “Why did I even buy this share?”
Great, now you know how to study a company. But do you know how to use that knowledge? If not, then find out in our blogs, What is Value Investing? A Beginner’s Guide to Building Wealth, and Value Investing 101: The Timeless Strategy for Building Wealth
And if you really want to go a bit deeper and learn step by step, The WallStreet School’s Value Investing Program can guide you with real examples. It’s not a quick trick, it’s about slowly building confidence to invest smart.
At the end of the day, the stock market’s real secret is simple: the more you learn, the more you earn.
FAQs
Q1. How to analyze a stock before buying it?
- See what the company does
- Check how much it earns
- Look if it has loans
- Make sure the industry is growing
- Compare with rivals
- Check if the price looks right
Q2. What are the 3 types of stock analysis?
- Fundamental analysis → study company reports, business, and numbers
- Technical analysis → check stock charts and price moves
- Quantitative analysis → use maths, data, and models
Q3. How to research stocks to buy?
- Read company reports.
- See how the company earns money.
- Check sales, profit, and loans.
- Make sure the industry has a future.
- Compare with other companies.
- Notice if leaders are honest.
- Check if the share price looks fair.
Q4. What is the 90% rule in stocks?
There’s no set 90% rule in the stock market. Some people use it to say most gains or losses come from a few trades. The point is, stay patient and pick good stocks.
