Investing your money in different sectors may seem easy. However, if you want your investment to be successful, you must do some homework.
Investing in stock is not just a purchase but you are becoming a part of a company. Therefore, before buying a stock, you need to do proper analysis, study stock's fundamentals and find out whether the stock fits in your portfolio. Your goal should be to discover a good deal, especially if you're investing for the long term.
Remember that every stock market advice is based on an extensive study conducted by specialists. So, do your homework and read reviews before investing, but don't wait too long or you'll lose out on the best deals. Go now and put your money in the stock market.
But, how can you decide which stocks to purchase and when to purchase them? Today we're here with 10 factors that you need to consider before investing your hard-earned cash in stock. Let's get started.
1.
Time Horizon
First, it's important to decide the tenure of your stock investment; whether it is short term, middle term or long term.
A short term time horizon is an investment that you intend to liquify within one year. In the short term, you may sell the investment after you've achieved the return level you expected, say 10-15%.
A medium-term time horizon is an investment that you plan to hold for a period of one year to ten years. For the middle term, you should invest in stocks that have a moderate level of risk and in quality emerging markets stocks.
Lastly, a long term time horizon is an investment that you wish to hold for more than 10 years. Here, you may purchase stocks of companies that are likely to perform well in the next 5-10 years and are fundamentally strong.
Companies that have a good balance sheet and are well managed are usually regarded as fundamentally strong. Shares of these companies are generally known as blue-chip shares.
2.
Investment
Strategy
It is important to research different kinds of investing strategies before purchasing a stock and find the most suitable one for you. Most successful investors use growth investing, value investing, or income investing strategies.
Growth investing is the process of identifying stocks that have outperformed the market in terms of earnings and sales. It is believed by growth investors that the upward trends in these stocks will go on, creating a chance to gain outsize profits.
Value investing means purchasing stocks that are undervalued in comparison to their peers with the hope of generating profits. It is a tricky strategy and many investors have made huge profits using it.
In income investing, you need to find quality stocks that issue notable dividends. You may either reinvest or spend the dividend money to boost your potential earnings.
3.
Balance Sheet
The balance sheet of a company is a major
part of any fundamental analysis attempt. It provides a swift overview of the
financial stability and strength of the company. Moreover, a balance sheet
reveals the amount of debt the company
owes, the value of assets it owns, and the equity of the shareholders.
Debts can be overwhelmingly burdensome. Moreover, mounting debts can sometimes cause bankruptcy. Therefore, it is really important to consider the assets the company owns concerning the amount of debt it owes.
You can also get precious information by checking the cash flow statement of the company. This shows the amount of cash flowing in and out of the company. Of course, you would want to invest in a shock that has more cash coming in than going out, indicating additional financial strength.
4. Price-to-Earnings Ratio (P/E Ratio)
You should check the fundamentals before investing in a stock. And when using value investing strategies and fundamental analysis, the P/E ratio is regarded as a great indicator of whether a stock is overvalued or undervalued by the market. It's a valuation metric that indicates how well the price of a stock reflects the earnings of the company.
The P/E ratio can be found by dividing the company's stock price by its yearly earnings per stock, either estimated over the coming year or the past year. For instance, when a company is trading at $20 per share and the earnings per share are $2 annually, then its P/E ratio is 10.
The P/E is a major method to study companies in the same sector or industry. A company with a high P/E ratio is more valued by the market than the one with a low ratio. As an investor, your task is to find out if the stock is worthy of that lower valuation or if it is undervalued by the market, which could make it a good choice.
5.
Volatility
Volatility outlines the fluctuation rate in a stock's value or other financial assets. The lower the volatility, the slower the stock price will go up and down, while higher volatility assets will change at a rapid pace. However, do not forget that volatility outlines the fluctuation rate in value, not the direction of those movements.
If you invest in a stock with low levels
of volatility, it will move quite slowly and in case of any alteration in the
recent uptrend, you will get enough time to cash in on your profits.
However, the high-volatility stocks will fall shockingly on bad days and climb dramatically on good days. You won't get enough time to exit the investment during an alteration in the recent uptrend that may lead to missing out on any profit you could have had. Sometimes, a dramatic change may even lead to losses. Therefore, these stocks come with remarkably more risk than low-volatility stocks.
6.
Dividend History
If you do not have enough time to check the market condition every day and want to make money without much attention, you may consider dividend stocks. Dividends are known for rewarding a part of their profits to their investors. Generally, the board of directors of a dividend decide the amount. It is usually distributed in cash, although some companies provide dividends in the form of stock shares.
Dividends are a great investment as they allow a stable stream of income. In times of economic uncertainty, dividend-paying companies can give a sense of security to the investors. They are issued at regular intervals by most companies, mostly every quarter.
Large companies having predictable profits usually issue the best dividends. In high-quality stocks, dividends of 5% or more are quite common. Start-ups or companies in an early stage may not have enough profit to provide dividends yet. Some of the common divisions with dividend-paying companies are pharmaceuticals, healthcare, banks and financials, oil and gas, utilities, and basic materials.
Before you invest in stock shares, study the dividend rate of the company. If your goal is to park money in the market, simply purchase stocks with a high dividend.
7.
The Chart
There are different kinds of stock charts. These include candlestick charts, bar charts, and line charts- charts used by both technical analysts and fundamentalists.
You do not need much skill to read the basic chart. If a chart begins at the lower left and finishes at the upper right, it is a good sign. However, if a chart goes in the downward direction, stay away from that investment.
8.
Diversification
Diversification plays a major part in
maintaining and building a good investment portfolio. You can spread your
investments across different stocks and other securities across different
markets and industries by this process.
Before investing, you need to consider the degree of diversification you already have within your portfolio. For instance, if you only have tech stocks in your portfolio, like stocks of Amazon.com or Apple, it won't be wise to invest in the tech sector again. Because, if the tech sector crashes for some reason, your portfolio will tank along with the sector.
However, if you purchase stocks in other
groups, like consumer staples or utilities rather than purchasing more tech
stocks, even if the tech sector crashes, the other stocks in your portfolio
will allow stability.
9. Popularity/News
News influences the decisions and expectations of the investors, and expectations regulate stock values. Popular companies like Apple and Yahoo are frequently in the news, and their valuations are occasionally inflated by media hype.
Try not to invest in shares that are the victim of television headlines and newspaper publicity, and there will be much easier sailing.
10.
Insider Activity
Find out what is happening inside the company itself. The insiders know about the condition of the company more than any analyst. If the individuals inside the company purchase an increasing number of shares, it may be a good time to invest. However, if the CEO just dumped a large number of shares, it may be time to exit the investment.
The Bottom Line
Venturing into the stock market may seem
a bit intimidating in the beginning. However, you must educate yourself about
that market, the stock itself, and the overall condition of the economy before
pulling the trigger on the investment. Happy Investing!
