(4) Stake Of Promoters
It is one of the most unbeatable & tricky ways to identify and avoid value traps in stocks. A high stake of insiders or promoters in a company is a good sign for the company. It gives maximum profits to find ways to increase the shareholder value.
However, several investing institutions and large funds that have the capability to move stocks will stay away from such companies.
It is perhaps due to their inability to influence the corporate governance issues and management decisions.
This lack of institutional interest could cause a stock to become value trap rather than a good value stock.
[Read Also: 25 Basic Rules For Investing Money In Stock Markets]
(5) Excessive Debts/Leverages
It is one of the most important & tricky ways to identify and avoid value traps in stocks. An excessive amount of debt or leverage is a possible sign of value trap for its investors.
Higher debts can adversely affect the financial situation & growth prospects of even a great company in touch times.
Debt-to-equity ratio of a company must be as low as possible. A company with less or no debt can easily meet its debt obligations. It helps them to sustain even in difficult times.
Thus, you should avoid high debt ridden stocks as they are often false bargains.
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