How I built my Stock Universe?

My Stock Selection Criteria

In this section, we’ll talk about how to choose stocks for three different groups: X40, X40N, and X200. Each group has its own selection criteria. The important thing to know is that not all strategies work for every stock, and you’ll need to match the right strategy to the right group. This will become clearer as we dive deeper into trading strategies later.

Different strategies might work better for different investors depending on things like how much time they have, their experience level, and how much risk they can handle. The risk we’re concerned about here isn’t just about losing money — it’s also about the volatility of the stock and how long you may need to hold it. That’s why, instead of using a stop loss for trading, we focus on choosing the right stocks from the start.

1. X40 — This group includes large-cap and mid-cap stocks.
2. X40N — This group includes mid-cap and small-cap stocks.
3. X200 — This group includes large, mid, and small-cap stocks.

X40 and X40N follow the same stock selection criteria, while X200 has its own set of rules. Let’s break down each one.

In the NSE (National Stock Exchange), we classify companies based on their size or market capitalization:

• Large-cap: These are the top 100 companies.
• Mid-cap: These are the next 150 companies after the large-caps.
• Small-cap: All the remaining companies.

Since the NSE has more liquidity (meaning stocks can be bought and sold more easily), it’s where most retail investors trade. The NSE lists around 2,000 companies, while the BSE (Bombay Stock Exchange) lists about 4,500 companies. The market capitalization of the 100th company in the list can tell us a lot about how the market is doing.

It’s important to remember that a market leader can be found in any of these categories — large-cap, mid-cap, or small-cap.

Practical experience in the market is crucial for understanding how to apply this knowledge effectively.

Qualitative Conditions for X40 and X40N

To select stocks for X40 and X40N, a company must meet these 6 qualitative conditions:

1. Debt-free: The company should not have any debt.
2. Market leader: It should be a leader in its industry.
3. Established business: The company should have been in business for the last 10–15 years.
4. Pricing power: The company should have a moat, meaning it has some competitive advantage that allows it to set prices without losing customers.
5. Growth prospects: The company should have potential for growth over the next 10–15 years.
6. Not a government company: The company should not be government-owned.

Conditions for X200 (Excluding Banking & NBFC)

For X200, which includes large, mid, and small-cap stocks, we look at the following criteria (excluding banking and NBFC companies):

1. Debt to equity ratio should be less than 0.25.
2. ROCE (Return on Capital Employed) should be greater than 20%.
3. Net Profit over the last 12 months should be more than 200 crore.

Conditions for X200 (For Banking & NBFC)

For banking and NBFC companies, the conditions are slightly different:

1. ROE (Return on Equity) should be greater than 10%.
2. Net Profit over the last 12 months should be more than 1,000 crore.

It’s important to update the X200 list every quarter. This ensures that you’re always working with up-to-date information.

If you loved this story, please feel free to check my other articles on this topic here: https://ankit-rathi.github.io/tradevesting/

Ankit Rathi is a data techie and weekend tradevestor. His interest lies primarily in building end-to-end data applications/products and making money in stock market using Tradevesting methodology.