Investing in stock is an excellent way to build substantial wealth. However, stock prices are very volatile which makes investing highly risky and can even lead to massive losses particularly if investors are not keen enough before they buy a stock. It is imperative to do a thorough research before you place your hard earned cash on a company stock. Here are 5 things to consider before you buy a stock:
1. The Company’s Mission, Vision, Goals, and Objectives
Find out the business that the company is involved in and what they intend to achieve in the long-run. Make efforts to understand the company’s mission and also avoid investing in what you don’t understand. You can search the internet and the company’s web page so as to gather all the information available regarding the company mission, vision, and objectives. You can also get such information from the company’s brochure and other publications. A stock value of a company with a viable mission and vision is likely to grow and so it is less risky to buy.
2. Find Out the Company’s Financial Performance
Companies publish their financial statements quarterly and yearly and investors can check the company’s earnings and whether the company is making substantial profits. Find out how much net income the company reported in dollars and in per-share earnings. Find out the company’s earnings history by checking past news stories and company’s quarterly statements. It is also important to check whether there are any red flags that can make you question the company’s integrity. Find out if the company has a history of steady earnings growth or the earnings are usually volatile. Find out the future growth possibility of the company. Analyze the company’s balance sheet to find out the company’s liabilities versus assets and check if the company incurs huge loans. Check how much the company is spending on research and development and how large its inventory levels are. Check the 10-k report that a company has filed with the Securities and Exchange Commission. Also, check the 10-Q report which is similar to 10-k only that it is required on a quarterly basis.
3. The Stock Valuation
The company’s valuation is determined by price to earnings and price to sales. It’s important to find a company whose earnings are growing exponentially and also check the value the market pays for that growth and the prospect of future growth. Investors also need to consider how much they are paying for a stock.
4. Find the Company’s Competitors
Every company has a host of other competitors unless it’s an industry dominated by one company. A company may be in an industry that is fragmented where even the biggest player controls less than 10% of the market. It is crucial to check the company’s position in the industry by finding out if it’s a bigger player or a small but growing niche player and whether it has the biggest market share in its industry. It is also important to check the international competition from foreign firms in the industry. Find out whether the company’s competitive position is sustainable.
5. Check the Company’s Executive Management
There are numerous ways to find out about the leadership of a company, their background, and the company’s history. You can research on the company management y searching online sources on the internet and also by checking the company’s main website. You can also find out more information from their financial statements that are periodically released to the public and from the trade publications.
Any serious investor put enough efforts in digging up for any information that determines the success of the company that they intend to invest in. I hope this guide will help you to make an informed decision.