.png "Is It Good To Invest In Falling Stocks?")
The dilemma!!!
On one hand, falling stocks will enable the investor to purchase it at a much lower price, allowing greater profitability when the price actually rises.
On the other hand, a stock consistently falling in value is also a sign of weak performance, loss of consumer trust in the product, fall in profitability, and overall downfall of the business. In other words, the business is facing challenges that may last for a long term.
Now, the question is, which side of the balance is heavier? How can we evaluate whether it is fair to invest in or stay away from a stock that has been losing its value for some time?
Let us understand some simple facts:
Let us understand the fact that a fall in stock prices can be considered investment options which are basically speculative. You should always keep in mind that the price may go further down and it may or may not ultimately recover. Therefore, you should invest only that much money here you can afford to lose. This will, again depend on your risk appetite and income levels.
Along with US stocks dropping in prices, they are mostly low in volume too, which means sellers are selling off and at the same time, buyers are not eager to buy them, resulting in further falls. From the viewpoint of market sentiments, their demand is extremely low. So why take the risk of investing in them?
Then again, if the stock is a blue chip one, meaning a company that is fundamentally very strong, with great financials and a balance sheet, then even if the price is consistently falling, due to certain external reasons, it has a good chance of recovery. If we take the example of Tesla stock dropping or NVIDIA stock falling, it may not be such a bad idea to invest in them, since they are fundamentally strong businesses. So, this is a case that may give you a great return, provided you stay invested in it for the long term.
Points to analyse
You can always analyze the following points to gain a conviction on your choice:
- Free cash flow - Funds available with the company to meet its financial obligations like payment to creditors, interest on loans, meeting daily expenses, etc. Reduction of FCF will lead to a fall in performance and share value.
- ROE - Return on equity is the return that the company generates from investments made by equity shareholders. Lower value indicates lack of efficiency leading to fall in share price.
- Market capitalization - Number of outstanding shares multiplied by value of each share. A stock that is consistently falling will face a steady fall in this parameter.
- Pledging of shares - Promoters often pledge shares to take loan for the business operation. Check if a large number of shares are pledged and is the company able to repay the loan. This will show the possibility of company promoters losing control over the management.
- Debt to equity ratio - This ratio explains the proportion of debt and equity in the company’s balance sheet. A company with falling stock prices may have very high D/E ratio, suggesting huge capital outflow on loan.
Conclusion
I am sure that after reading the above, you got a clear idea regarding what to study and analyze about stocks that are consistently falling in price, in case you are unable to decide whether to invest in them to build wealth. However such decisions require experience and in-depth knowledge. It is always better to take the help and advice of professionals in this regard so that your funds are invested in securities that have the potential for good returns in the future even though they may not perform well in the short term.
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