The following is a sponsored blog post:
When it comes to the stock market, you need to be careful about your options. Most investors simply don’t carefully weigh some of the stock-investment decisions they make. If there is something stock market crashes have continuously taught us, is that investing carelessly doesn’t always work.
Like any introductory period, there are considerations one should put in the ploy. It would be unfortunate for an investor to relearn a painful lesson of another crash. To avoid that, here are some of the things you should consider before buying a stock:
1. What the Company Does
Never invest in what you do not understand. Make sure you look up the company on the internet and check their website and find out how legit they are before you think of buying stock.
2. The Profitability of The Company
You can always read the quarterly and annual earnings reports. The reports help you check how much net income the company you are looking to invest in has reported, in per-share earnings and dollars. Look out for red flags in their earnings.
3. The History of the Company’s Earnings and Outlook
The company’s past quarterly statements can help you tackle this. Check whether the company has a history of steady earnings growth and if their earnings are volatile. If the company happens to be a maturing tech company, check whether it has been able to sustain the high growth.
4. The Company’s Stock Value
The company can have earnings that are growing well but lack the value the market pays for its growth and hence lack prospect of future growth. You can easily find their price-to-earning numbers online. It is crucial to consider how much you are paying for a stock.
5. The Company’s Competitors
Just like there is a Pepsi for every Coke, there is a competitor for every company. You should be able to know where the company you want to invest with stacks up. Check if the company has the most significant market share or if it’s small but growing fast in the competitive industry. Also, make sure you pay attention to the foreign competition.
6. The Company’s Balance-sheet
If you are a severe investor, then you need to read over a company’s balance sheet and see how clean it is. Check if the company is saddled with massive debts and also compare how much it brings in. Check how much they are spending on development and research and how extensive its inventory levels are.
7. Read the Company’s 10-Q and 10-K Annual Reports
Every company is required to file a 10-K report annually to the securities and exchange commissions. Compared to the more sanguine annual reports companies file during earnings season, the 10-K report is more in-depth. The 10-Q report on the other hand, it requires on a quarterly basis. Make sure you read both reports in-depth.
8. Company’s Integrity
Watch out for the red flags that can make you question their integrity and especially in the 10-Q and 10-K fillings. First of all, if the company has not detailed the risk factors, that undermines its prospects. Secondly, how the company explains their accounting practices and operating assumptions on issues ranging from an assumed rate of growth for its pensions to depreciation rates on its assets will tell you whether the company is getting too aggressive.
Very interesting article DH, thanks for sharing the list with its clear explanation.
Hi MR,
There are many things to consider when buying any stock. Of course, no matter how many times we look at numbers and trends we must still go with a gut instinct for better or worse. Even if the numbers tell a compelling story other factors can be at play when it comes to buying a stock. Thank you for commenting.
Nice clear step by step outline. As many DivHut readers and investors know, most of these steps can be broken down further and be worthy of their own separate article. Stock valuation is especially interesting. You could ask three investors about the fair value of a stock and get three different answers depending on the valuation methods they use and their specific investment objectives. Thanks for the post. Have a great weekend. Tom
Tom @ Dividends Diversify recently posted…Turnabout is Fair Play! Let The Companies Do The Work.
Hi DD,
I totally agree with you regarding valuation methods. I find the whole concept of valuation to be very subjective in nature. Even when looking at objective numbers the various ways those numbers can be interpreted opens oneself up to differing opinions. The bottom line with any investing endeavor suggests that one should be comfortable with their choices no matter what popular opinion may dictate. Give me any stock or asset class that exists and I’ll find you many different opinions that show why it’s good or bad to own. Thank you for sharing your thoughts.
All great things to look at before investing. There are so many more that can be added to this list as well. You are buying a piece of the company more or less, so make sure all the reasons are there.
Hi DD,
That’s true. You know the saying about buying stocks, “Think like an owner.” After all, you are becoming part owner of a business so make sure you are putting your hard earned cash into something compelling. Thank you for stopping by and commenting.