When investing in stocks, timing is everything. The right decision at the right time is what makes investing in stocks a profitable proposition. Timing your decision too late could be expensive – whether you plan to buy or sell shares. Timing it too soon, could mean that you do not get the best value from your investment. Several people invest their money in stocks, hoping to reap dividends. However, not all of them generate the profits that they dream of. This is because not every investor spends time in doing the necessary due diligence before purchasing stocks.
What Factors Should You Consider before Buying a Stock?
To help you derive the best value out of your investment, here is a list of factors to consider.
- Check what the company does i.e. its business sector, its offerings etc.
- Check the company’s levels of profitability by examining its quarterly or annual earnings reports
– In particular, focus on checking aspects like:
a) The net income of the company
b) The per-share earnings of the company
- Examine the company’s earnings history
– Check whether the company has a history of steady earnings growth
– Also, consider that a maturing company might not be able to register exponential increases in its growth as a younger company does
- Analyze the company’s balance sheet
– Aspects to focus on include:
a) The company’s debts
b) The company’s liquidity levels
c) The company’s inventory levels
d) The company’s earnings (these should reflect year-on-year growth)
e) The company’s Return on Assets (ROA) i.e. how efficiently the company is generating earnings
f) The company’s Return on Equity (ROE) i.e. how efficiently the company is managing its investors’ capital and its debts
g) The company’s focus on research and development
h) The company’s net margins i.e. how efficiently the company is generating profits from sales
- Analyze the competition
– Compare the company you’re interested in with the company’s business rivals
– Which company has the biggest market share?
– Does one company dominate the market or is the market highly fragmented in nature?
- Examine the company’s leaders and management
– Research the net for finding details about the company’s leaders, their backgrounds, their associations with this company, their tenure and the company’s history
– Identify the characteristics that point to a stable and well-reputed leadership
- Consider reading the company’s 10-K and 10-Q Annual Reports
– These reports carry information that is more detailed than the information found in the company’s annual reports
- Examine the risk factors associated with the company
- Check whether the company’s position in the market is sustainable
Investing in stocks is a great way to derive the optimal value from your money. However, unless you’re investing in an index, you will need to pay close attention to the ebbs and flows of the stock market. In addition, you will also need to identify and monitor the stocks that seem like worthwhile investments. Therefore, do your homework, before investing your hard-earned cash in a company’s stock. You won’t complain when the stock prices rise. However, if they drop, you could end up losing all that you had invested in it.