When you decide to buy a stock for investment purposes, it’s important to do your homework because you’re putting your hard-earned money into it. Your goal should be to find good value, especially when you’re buying stocks for the long term.
But before you fully trust a company, you need to do extensive research, analyze the fundamentals of the stock, and check to see if that stock is a good fit for your portfolio before buying a stock.
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You’re not just buying a stock, you’re becoming a shareholder in that company, so as an investor you need to do the proper research.
Here are ten key factors to know about a company before you buy a stock and invest your hard-earned money.
1. time horizon:
First of all, you need to decide the time horizon before buying a stock as it plays a crucial role in the decision to buy that stock or not. your investment time horizon can be short, medium or long term, depending on your financial goals.
- Short-Term: A short-term time horizon is any investment you plan to own for a year or less. If you plan to buy a stock and hold it for less than a year, then it’s best to invest in stable, blue-chip stocks that pay dividends. companies have a good balance sheet and there is less risk involved.
- Medium-Term: A medium-term investment is an investment you want to hold for one year to 10 years . For medium-term investing, invest in quality emerging market stocks and stocks that have a moderate level of risk.
- Long-term:Finally, long-term investments term are any investment you plan to hold for more than 10 years. these investments have time to recover if something goes wrong and can generate a significant return.
2. investment strategy:
Before buying a stock, it is important to study several investment strategies and choose the one that best suits your investment style
Below are three key types of strategies used by the most successful investors:
- Value Investing: Value investing is the type of investing in stocks that are undervalued compared to their peers in the hope of generating profit. This is the strategy that Warren Buffett uses to make big profits.
- Growth Investing: Growth Investing is the type of investment in stocks that show higher than market growth in terms of revenue and profit. Growth investors believe that the uptrends in these stocks will continue and create an opportunity for profit.
- Income Investing: Finally, investors should look for quality stocks that pay significant dividends. These dividends generate income that can be used or reinvested to increase earnings potential. therefore, before you buy a stock, you should consider the strategy that is a good fit for that investment style.
3. check the fundamentals before buying a stock:
Investors should check the fundamentals before buying a stock.
Famous investors like Warren Buffett made a lot of money by comparing the current market price of stocks to their fair market value. According to him, an undervalued stock will reach its fair or intrinsic value.
some of the most important ratios to consider before buying a stock:
- Price Earnings Ratio (P/E Ratio): This ratio compares the stock price to the company’s earnings per share (EPS). For example, if a company is listed on Rs. 20 per share which yields eps of rs. 1 annually, so your p/e ratio is 20, which means the share price is 20 times the company’s earnings on an annual basis.
- debt-to-equity ratio- Debt- The equity ratio helps determine how much the company is in debt. high levels of debt are bad, as they indicate bankruptcy.
- Price-to-Book Ratio (P/B Ratio): This ratio compares the stock price to the net asset value owned by the company, and then divided by the number of shares outstanding.
4. stock performance compared to its peers:
Investors should also check how the stock has performed compared to its peers. websites like stockedge and google finance help companies compare themselves to their peers.
5. shareholder pattern:
Investors should check the ownership pattern before buying a stock.
promoters are entities that have a great influence on a company. they may have a large controlling stake in the company or hold senior executive positions.
Therefore, investors should invest in those companies that have a high share of promoters, a high share of domestic institutional investors, and also a high share of foreign institutional investors.
6. holding mutual funds:
When a stock is held by many mutual funds, it is generally considered a safer stock compared to other stocks that are not held by any mutual fund.
7. company size:
The size of the company you are considering investing in plays a crucial role in the amount of risk you want to take to buy a stock.
Therefore, it is important to consider the size of the company compared to its risk tolerance and time horizon before buying a stock.
The size of publicly traded companies can be determined by looking at the market capitalization of the company as shown below:
8. dividend history:
Dividend stocks are known for giving a portion of their earnings to their investors in the form of dividend payments.
Investors following the income investing strategy should try investing in these dividend stocks.
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If the investor’s objective is to generate income through their investments, they should consult the company’s dividend history before buying its shares.
Income investors looking for a high level of income compared to the share price should look at the company’s dividend yield which is expressed as a percentage.
9. revenue growth:
Before buying a stock, investors should look at companies that are growing. this can be determined by checking both your income and earnings.
Stocks with high levels of volatility will rise rapidly on bull days and drop like a brick on bear days.
If you invest in a slow-moving, low-volatility stock and a recent uptrend starts to reverse, you can recoup your gains before they are gone.
on the other hand, stocks that show fast movements don’t give you much time to get out of the investment and when a trend reverses, it could lead to losses.
The stock market has a constant influx of newbies every year. This is especially true of India, where Gen Z is actively interested in making money. Influencers have taken to various social media channels, spreading their wealth-building insights steadily. Today, youth is more interested in the best stocks to buy, the best stock market courses for beginners, the best strategies in the stock market to create wealth. As a result, newbies start actively trading, most of the time without solid knowledge.
You can also watch our video on how to start trading the stock market:
Before you buy stocks and add them to your portfolio, you want to make sure you buy the best companies. Stock screeners like Stockedge can help you filter out companies that meet your investment or trading requirements.