You might think that it’s unnecessary to be told over and over again that you should do your homework before you invest in stocks, but the reason finance experts repeat themselves is because studies show that investors still aren’t weighing their options properly. Most people invest in the stocks that receive a lot of press, without realizing that it could be bad press that has kept those stocks in the news.
Some of the must-ask questions in this article may seem like common knowledge to experienced investors, but a refresher course in this regard wouldn’t hurt anyone. These questions wouldn’t ensure a guaranteed win in the stock market, but will definitely teach you how to become a smarter, more knowledgeable investor.
1. Is The Company Turning A Profit?
This question may seem simple. But when you research a company’s profit margin and annual income, it will give you a basic idea of how good an investment that company’s stocks are. Read the financial reports to find out the net income that the company makes, in both pre-share earnings and dollars.
2. What Do They Do?
Again, a question that’s so simple, you probably don’t understand why it’s on this list. By finding out exactly what the company that you’re investing in does, you can make sure that you never invest in something that you don’t understand.
3. Is The Company’s Stock Valued Richly?
Just because a company has earnings that seem to be on an exponential growth curve doesn’t mean that it is a good investment. In the stock market, a company is value based, both on its current growth and its potential growth. Value the company by making basic ratio comparisons like price and earnings or sales and price.
4. Is The Company Being Led Intelligently?
Find out who runs the company, and do some digging into their business ideals, their history, extent of their experience in the field, and general competence. You can do this by checking out trade publications from the industry that the company is a part of. If a company has a suite of executives who are constantly leaving or being fired, and then replaced, it may be a sign that the company itself is unstable.
5. Who Is Their Competition?
Companies are always in a constant battle to wrest business from each other. There is a Pepsi for every Coke, and a Microsoft for every Apple. You need to figure out how the company compares to its competitors, and how much of an influencing role it plays in the market. Remember that a company can start out small, but if it is a fast-growing, niche player in its industry, then it’s probably a good investment.
6. Can You Spot Any Red Flags?
10-Q and 10-K filings come into play here. Look at the company’s stance on the rate at which its pensions are growing and assets are depreciating. They will tell you if it is becoming too aggressive. You can also look at the risk factors that may hinder its prospects, which is reported by every company in this annual and quarterly reports.
7. Do They Have A Clean Balance Sheet?
If you’re a long-term, serious investor, you need to set aside time and energy to look through the company’s balance sheet. It’s not just to look at their earnings. You also get an idea of whether they’re up to their eyeballs in debt, how large their inventory is, and how much they spend on R&D. If inventory levels are growing compared to the previous year, it may mean that they’re slowing down.
8. Is The Company Going To Last?
The answer to this question will tell you whether the competitive position of the company is sustainable. If your investment plan isn’t long term, this may not matter to you, but it doesn’t hurt to read up and use the speculations of the experts to invest smartly in a company that has real sustainability.