5 things to consider before investing in a stock
Stock picking can be a tremendously confusing and time taking process that involves a lot of analytical thinking and judgement. For beginners who are new to the investing in a stock analysis process this activity can be significantly confusing and easy to make mistakes at. Although once you set a base and get some experience it can be a time taking but a smooth and easy process to fulfil.
Every individual has their own way of analysis but here is a list of 5 essential things an investor needs to know before buying a particular share:
Valuation: It is extremely important for a long term investor to consider the value of the share he/she is analysing. It is favourable to purchase shares that are at a discount but high growth shares tend to trade above valuation due to positive future outlook. The valuation of any company can be judged through financial ratios like Price to Earnings and the financial statement of the company. ‘Price is what you pay, value is what you get’ is a famous quote by the world’s most successful value investor- Warren Buffett, which sums up the importance of valuation.
Moat:Many of you would be hearing this term for the first time, a moat is an aspect that sets the company apart from its competitors. Moat is the quality that drives the consumers of the industry towards the particular company rather than its customers. One of the main considerations of Mr Warren Buffett before buying a share was its moat. A moat can also be described as the company’s ability to maintain an advantage over its competitors for the long term.
Financial Performance: At the end all that matters is the bottom line. This phrase is very suitable for the stock market as well; if the company has a prosperous bottom line it will do well and make you a lot of money. Before any investment it is vital for an investor to study the bottom-line of the company using different method of fundamental analysis. It is not necessary that a company that is in a loss is doing bad but whether it is decreasing the amount of loss and moving towards profit or not is important. Financial performance can be effectively measured through the analysis of the company’s financial statements like P&L.
Future of the industry: For any long term investor the future outlook is very important. For example I would not invest in a company that makes phonebooks even if it is profitable because I know that the future of the industry is dark. I would rather invest in a company involved in E-Commerce even if it has not yet reached profitability due to the fact that the industry’s future has a lot of potential.
Management: The speed of the car and the safety of the passengers are in the hands of the driver, in case of the stock market the car is the company, the investors are the passengers looking to reach the destination of capital gains whereas the driver is the management. A good quality management is extremely essential for a successful company. The quality of the management can be judged by their past performance, public interactions, how they handle negative outcomes etc.
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