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What to Need to Ask Before You Buy a Stock

It may seem quite obvious that you need to carry out a sufficient level of research before investing your hard-eared money on a company’s stock, however, several people do not. There are investors who solely rely on what they see on the news to know which stocks to buy. Unfortunately, the news is not always as reliable as they believe and only depending on it for information is definitely not a good practice for the stock market. Stock market crashes have taught us numerous occasions that the carefree investing method does not work in the long run. Normally, its success comes to a sudden conclusion.  It is important for investors to remember this before the next time stocks crash. There are some questions an investor must ask themselves before committing to purchasing a stock. You must note that having all the answer is not a guarantee that the stock will be successful. However, thinking about these questions will turn you into a better and more well-informed investor.

  • 1.      What does the Company Do?

Accomplished investors such as Warren Buffett do not invest in things he does not comprehend. It is a very simple question but an important one as well. If you want to know what a company does, you can simply take a look at its website and related news articles about it to gain more information.

  • 2.      Is the Company Profitable?

This question is relatively easy though it can be greatly complicated by numerous factors in the company’s revenue. Investors may go through the quarterly and annual earnings reports to determine the net income the company obtained. Understanding the reports is an important step as you can identify red flags that may come back to bite you in future if you are not careful.

  • 3.      What is the Company’s Earnings History and Outlook?

This question may be answered by going through older news articles and the organization’s past quarterly statements. The information you are looking for is to determine whether the company has a history of steady growth in its earnings or whether the earning are volatile. You should not that success in previous years does not guarantee success in coming years but you should be wary of how a company performed in the past to determine whether it is worth investing for the present and future.                  

  • 4.      How Richly is the Company’s Stock Valued?

It is great to discover a company with earnings that are growing at a fast rate, however, the other factor to consider is the worth that the market pays for that growth and the possibility for future growth. Fortunately, there are many simple techniques of finding out the valuation of a company including price to sales and price to earnings.  You can locate these figures online. Some of the figures such as price to earnings are not a full proof measure though investors must think about the amount they are paying for a stock. 

  • 5.      Who are the Company’s Competitors?

Every company has a bunch of competitors trying to take business away from each other. Investors must know where in the pecking order their companies lie. Investors need to know the position of a company amongst its competitors and its place in the market. Foreign competitors should not be overlooked as they can significantly influence profit margins.

  • 6.      Who runs the Company?

Investors lack the capability to stop by a company’s headquarters and talk with the management before coming to an investment choice. Despite this, there are still several other methods to get more information about those in charge of the company. Any respectable company possesses a website that lists its top managers, their duration at the company, their background, and the company’s history. If the top managers do not usually stay too long at the company, that could indicate in a bad way about the company’s stability. Investors must also research on articles about the company executives to obtain more information about them to make a more informed choice on which stocks to buy.

  • 7.      How Clean is the Company’s Balance Sheet?

Highly focused and long-term investors require having the ability to go through a company’s balance sheet. A company’s earnings alone do not give you sufficient information as to whether the company has some serious debts to pay off so that it can attain those earnings. It is also a good idea to look at how much the company is investing in research and development as well as the size of its inventories.

  • 8.      Have You Gone through the Company’s 10-K and 10-Q Annual Reports?

The 10-K report is the mandatory report each company needs to file to the Securities and Exchange Commission. It contains a greater level of detail than the annual reports. The 10-Q is similar to the 10-K though it is a quarterly report filed on a quarterly basis. 

  • 9.      Are there any Red Flags That Makes You Question The Integrity of the Company?

The 10-K and 10-Q reports are quite important in this particular case. Each company requires to state in detail the risk possibilities that can deter it from attaining its business goals. The reasons given on the accounting habits and operation assumptions for the company on issues covering from lowering rates on its assets to estimating rate of growth for its pensions give a lot of information on the state of the company which is ideal to determine which stocks to buy.

  • 10. Is the Company’s Competitive Place Manageable?

Depending on how long an investor desires to commit to investing in a company, this factor is relatively important. Investors who are after short-term profits need not worry about this question but for investors that are serious about committing for the long haul, it is important. Doing research on the existing market and steps taken by its competitors as well as the reactions the company desires to take to handle changes in the market are all important. Look for information in news articles about actions taken by the company and its competitors in the market. Depending on how the company acts or does not act, it can be a critical factor in determining if the company has what it takes to stay relevant in the long term.

3 Mar 2017 4:38 PM | Anonymous

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