If you’re thinking about investing in a company’s stock there’s a couple of ways of going about it. The first is by trading their stock on the financial markets as a trader betting on whether the stock price will go up or down. And whilst this is a simple way to get involved in investing unless you have a good idea of what you’re doing you could lose a lot more money than you put in, which is what happens more often than not.
The other option for investing in a company’s stock is to buy actual shares in the company and become a real shareholder. It’s still not without risk, but out of the two options, this is probably the safest way to make your money work for you.
Many people look to investing as a way out of the rat race and as a path to financial freedom. It’d certain;y worth looking into, because it works for a lot of people. However, you MUST do your due diligence on the company before parting with any cash. Most of the information to help you make an informed decision can be found online and here’s some of the questions you should have the answers to.
How do you know that you are ready to invest in a company’s stock? Here’s a list of 10 questions to help you make that investment decision. If you can answer all the following questions with YES, then you are prepared to make a decision as to whether or not to invest in a company –
Do I know the company’s revenue model?
It is imperative to be absolutely clear about how a company is making money before investing in it. Understand what it has to offer to its customers. Know about the company’s popular goods/services, the markets it operates in, the channels through which it sells the products. Understand its primary customers. A company with long-term purchase contracts with its customers will have smaller fluctuations in revenues than a company whose products are seasonal in nature.
Do I understand the industry the company is operating in?
This is very important information. Prior to making an investment decision, you should be aware of the industry dynamics, what type of market forces affect the movements in this industry, and what type of policy decisions can impact the industry. Learn about the value chain of the sector and assess where the company fits in it. Understand what sort of sector it is – fragmented, in a consolidation phase, dominated by a few big players, etc. Anything that affects the industry will impact the company as well.
Do I know who the company’s major competitors are?
Companies don’t operate in silos. Competitors’ actions can impact a company’s market position, revenues, and profit margins heavily. The company’s competitive position in the market speaks a lot about its performance. Read about what the competitors are doing, what they are investing in, have they launched a new product/service recently, what is the market saying about the competition. This will also give an idea about the competitive strength of the company that you choose to invest in.
Am I aware of the current financial position of the company?
The financial situation of a company is of utmost concern for investors. It gives an idea of how the company manages its operations. You should have a basic understanding of the growth in revenues and profits, cash flows and the debt-equity ratio of the company. You will also find the reasons for improvement or decline in performance in the annual reports of the company. Reasons that indicate cyclical downturn, loss of market due to new technologies, etc. should be taken as alarming signs.
Here’s how to find a companies financial reports
Have I seen historical financial performance?
By analyzing the company’s historical financial reports, you can make a decision about whether the company’s revenues and profits have been stable, improving, growing. This helps in understanding whether the company has a strong future or not. This information can be found in the annual reports or even online resources. You should look at a minimum of 3-5 years of past data. You should be cautious about investing in companies with negative cash flows, large debt, decreasing revenues, and profits.
Have I gone through its historical stock performance?
By analyzing historical stock performance, you can see what types of events have impacted the stock prices. This becomes helpful in predicting the behavior in times of major events. There are a number of online resources where you can get this information from. Make sure you have a really good look at the companies books before investing in a company’s stock.
Am I aware of the government policies that can impact the business of the company?
Government actions such as changes in the tax regime, immigration policies, tariffs, changes in import-export policies, environmental laws, etc. can impact the business of the company in a huge manner. These decisions can affect the revenues, profit margins, operations of the company. As an investor, you need to be aware of such changes.
Do I understand the company’s valuation relative to its peers as well as its own history?
You need to understand the valuation multiples to see what is the value that market is paying for the current growth of the company and the prospect of future growth. These numbers can be easily found online. Multiples of a company should be compared with its peers as well as its own history to see whether it is trading at cheap or expensive. You need to be aware of what you are paying for a company and are you comfortable with that.
Do I understand the company’s future goals and strategy?
The future results of a company are generally reflected in the stock prices. You should read the annual reports of the company to understand its growth strategy. You should also be aware of the management’s view of the uncertainties and how they plan to tackle these. This will give an idea of how the company is positioned for the future. Also, read about any acquisitions that they have made recently and see how they plan to gain from it.
Do I know the management team’s background?
Knowing the executive team behind the business can reveal many important aspects about the vision and mission of the company. You can understand how they plan to take the company ahead. Too many management changes within a short span of time do not give out a good sign. Just visit their website or go through their annual reports to know their management team. Research some articles about these individuals and see what the industry says about them.
When you’re thinking about investing in a company’s stock, always remember that you need to make “business-like” decisions. Passion or emotion has no business being in the investment market so keep them in check as you’re going through the questions. Be brutal and be honest it’s what will make you profitable.
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