Stock investing continues to be a popular option for retail investors to build their wealth, or plan for retirement. However, the risks behind investing continue to be inherent and market volatility is always ever present. How do experienced stock investors counter this? One crucial element to their success is the ability to choose a good stock and know when to buy it.
How to decide if a stock is worth buying right now?
Here are some guides you can follow:
1. Stock price
The primary basis when buying a stock is the price. When you know the price, you determine whether you can afford to buy a share of the company. The next is to find out how many shares your money will allow you to buy.
Prices are important because you want to make sure you’re buying at a good price. Also, there is a glaring potential to profit when you sell. The golden rule in stock investing has always been “buy low, sell high” and stock traders know how to capitalize on this.
2. Know the historical prices
The current price of a stock shouldn’t be the sole basis if you’ve done your homework. Those who are actively trading in the stock market pay particular attention to new highs or all-time records. It means that historical prices also matters.
Shares of companies go through a series of high lows. Price fluctuations are regular occurrences because some stocks are vulnerable to geopolitical events while others are influenced by market trends.
Hence, reviewing the historical performance or recent price movements can send buy or sell signals. But keep in mind that past performance is not indicative of future performance.
3. Study the company’s revenue growth
A stock price will follow the company’s revenue growth or decline. Generally, share prices go up if the company is increasing its ‘top line’ or revenue. A major indicator of a successful company is its income-generating potential and the ability to sustain it.
Publicly-listed companies are required to report their quarterly earnings. As an investor, you are in a better position to make a sound judgment based on the earnings reports. You can easily check revenue growth from quarter to quarter.
Growth investors are good at identifying growth stocks and ride on the momentum until the growth potential no longer exists. Growth investing is just one of the many investment strategies. Companies that do not belong in growth industries but have strong earnings potential are ideal buys too.
4. Analyze the Industry
If you’re about to invest in stocks, be objective and free yourself of personal biases. You’re not buying a particular stock on the basis of popularity. Fondness for a company and its products will not automatically deliver the earnings you want.
Analyze the industry to where the company belongs. The state of the industry bears weight on the stock performance. A business may be struggling because the industry or sector is undergoing severe strain.
The best approach is to steer clear of industries that are faced or beset with uncertainties. For instance, the technology sector might be affected by the ongoing trade dispute between the U.S. and China. And if tariffs will are imposed on tech products, there will be consequences for the companies operating in the sector.
5. Check the market capitalization
Market capitalization is the total enterprise value. The bigger the market cap, the more stable the company is to withstand the market forces and negative influences. However, it doesn’t hold true that the company is assured of steady growth and exempted from market volatility.
The market capitalization of a company can be computed by getting all the outstanding shares of the common stock and multiply them by the quoted or current price per share. At any given moment in time, that would tell you the company’s market cap.
6. Seek out reliable analyst reports
Investment banks and most stock brokerage firms release notes to investors on a regular basis. Their team of research analysts who prepare the reports issue recommendations (buy, hold, sell) regarding individual stocks.
Try to find access to these reports as it will free you from the extensive research work. The more reliable reports you can compare, the quicker you can make your investment decisions.
7. Learn the economic Indicators
Stock investors follow with great interest business news and current events. There are key economic indicators that drive the market for good or for bad. All of them are bound to affect your buying decision.
The most important economic indicator is employment as the economy’s health can be measured by the labour market. A high unemployment rate is not a good sign. Another major indicator is inflation. An inflated consumer price index (CPI) points to a high inflation rate, CPI measure the changes in consumer prices which will have a bearing on the average consumer.
In relation to employment and inflation, consumer spending is also a good gauge of the economy. Higher wages boost consumer confidence and lead to enhanced consumer activity.
A timely reminder for investors
Another key consideration for investors choosing which stocks to buy is how much time they are willing and able to spend understanding each stock. “Decide if you have time to be hardworking or not. If you are hardworking, then decide if this is a stock that you want to invest your limited time learning about and figuring out why the stock is cheap at this moment in time,” said TJ Tan, CFA, from DCG Capital. “If you’re short of time, you’re better off letting a trusted financial adviser or a fund manager to manage your spare cash,” he added.
At the same time, it is just as important for investors to know which stocks they should avoid altogether. “Generally, investors should avoid stocks or situations that fall into the ‘too-hard-to-understand’ category,” says Tan.
When is a stock too hard to understand? According to Tan, that occurs when it takes too much time to figure out why the stock is cheap or will do well; there are too many unknown factors that will impact the future outcome of the stock; there appears to be too much debt or leverage on the stock; and cash flow conversion is negative so investors are unlikely to see a cash payback.
Written by ZUU Online
This is a guest post by ZUU Online, an Asian-based Finance Education Portal aimed at helping individuals to improve their knowledge on personal finance and money, through educational articles on business, investments, property and insurance.
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