Investing In Stock When purchasing stock for investment purposes, make sure your goal is accomplished as effectively as possible. Your financial investments should yield considerable return.
Before placing all your faith in any company, it is wise to conduct thorough due diligence on them, investigate their essential components and see how well it fits within your portfolio. Before purchasing shares from them.
As an investor, purchasing stocks means becoming part of their company and thus needing to conduct proper analysis prior to making the decision to buy shares.
Before investing your hard-earned money in any company, here are ten essential details you must be aware of prior to purchasing its stock and investing your hard-earned capital.
1. Time Horizon:
Prior to making any stock purchases, you need to carefully consider your investing time horizon as this plays a vital part in making the final decision of whether to buy that particular stock or not. Your investing time horizon could range from short term (e.g. within one month or three years) or long term investments depending on what suits your financial objectives best.
Short Term : Short-term investments involve investments you plan on holding for less than a year. For this type of investment, blue chip stocks that consistently produce profits are best. Their organizations have strong balance sheets with minimal risks implied.
Medium Term-For a medium term investment to be effective, one should plan to hold onto it from one to ten years. When selecting such investments it is best to focus on high quality developing markets stocks with moderate risk profiles.
Long Term Investments : Long term investments refer to any investment held for at least 10 years, as this allows your funds to recover should something go awry and can produce substantial returns.
2. Investment Strategy:
Before purchasing stocks, take time to investigate various investment methodologies and select one which best matches your investing style.
Here are three systems used by expert investors:
Value Investing: Warren Buffett famously used this strategy of value investing to produce significant returns over his entire investment career.
Growth Investing: Growth investing refers to investing in stocks with market-beating growth when it comes to income and profits. Growth investors assume vertical patterns will continue in these stocks, creating freedom for potential profits to emerge.
Income Investing : Finally, investors should look for quality stocks that yield significant profits and use these earnings to expand income potential through either using them directly or reinvestment. When purchasing stocks it’s important to select an approach that aligns well with your investing style – it should fit seamlessly.
3. Thoroughly Examine Fundamentals Before Purchasing Stock:
Investors should research basic facts before buying stocks.
Warren Buffett made millions by comparing current market prices of stocks with their fair market values and anticipating that any underpriced ones would eventually reach their intrinsic values – or reasonableness.
Consider these ratios when purchasing stocks:
Price-to-Earnings Ratio (P/E Ratio)- This ratio compares a stock’s price with its earnings per share (EPS). For example, if a company trades at Rs 20 for each offer and generates annual EPS of Rs 1, its P/E Ratio will be 20, signifying that its offer price exceeds multiple times its profit on an annual basis.
Debt to Equity Ratio- The debt-to-equity ratio provides an effective method for measuring how much a company owes in debt, with higher levels indicating possible bankruptcy.
Price-to-Book-Value (P/B) Ratio- This ratio compares the stock price to the net value of resources claimed by the company and then divides this figure by its outstanding shares.
4. Compare Stock Performance With Peers:
Investors should compare how the stock has performed versus its peers; websites like Google Finance offer assistance in doing this comparison.
5. Shareholding Pattern:
Investors should first check the shareholding pattern prior to investing in any stock.
Promoters are instrumental to any company. They could hold significant ownership or lead senior executive positions within it.
Therefore, investors should invest in companies with high promoter ownership, domestic institutional investor holdings and international institutional investor holdings.
6. Mutual Fund Holdings:
Stocks held by multiple mutual funds tend to be considered safer compared to those not held by any mutual funds.
7. Size Of Company:
The size of the company that you plan to invest in plays an integral role in assessing its level of risk when purchasing its stock.
Before purchasing stocks, take time to assess how the size and risk profile of a company fit with your personal risk tolerance and time horizon.
Estimating the size of public corporations can be done by looking at its market capitalization.
8. History Of Dividend Stocks:
Dividend stocks are famous for giving investors a portion of their profits through dividend payments.
Investors following an income investing technique should prioritize investing in dividend stocks.
If the investor’s objective is to generate income with their investments, it is wise to research the company’s past performance before purchasing its stock.
Income investors in search of high returns should study a company’s profit yield which is presented as a percentage.
9. Revenue Growth:
Before purchasing stocks, investors should investigate companies with increasing revenue growth. This can be determined by closely inspecting both their income and profit.
10. Volatility:
Stocks that exhibit high levels of volatility will tend to surge swiftly on positive trading days and fall precipitously when things go against them.
When investing in low-volatility stocks that move gradually and the stock suddenly begins to show signs of rebound, you have time to lock in gains before they vanish altogether.
Stocks that exhibit rapid development do not present you with many options for exiting their investment, and any sudden shift could bring losses.
Conclusion
Before adding any stocks to your portfolio, it’s essential that they come from top companies. Stock screeners can assist in filtering through those which fit with your investment or trading criteria.
Have a successful investing journey!
