Investing in stock market is rewarding but at the same time, it is also very risky, especially if you don’t do your homework properly. Market uncertainties, volatility and various other factors can weigh down the value of your investment. Hence, it is very important for an investor to keep in mind a few things before investing in stocks.
1. Understand the company
The very important thing to consider before investing in the share market is to understand the company you are investing in. You may browse through the company website, read news articles and gather company information from other reliable sources.
2. Identify ownership and management
Identify the list of people who control and manage the company. Find out about their industry experience, professional expertise and background. In addition, ensure that owners of the company have little say in the functioning of the management.
3. Check out the earning pattern and source of profit
Before you invest in the stocks of a company, it is imperative to find out the annual earning reports of the company. Check if the company is reporting profits from normal operations or sale of long term assets. Go for a company which earns profit from operations.
4. Identify the company’s competitors
The market share of any company majorly depends on the strength and weaknesses of its competitors. Therefore, identifying a company’s competitors and its market share helps you in knowing where the company stands and analysing its cost competitiveness.
5. Review the past and present performance
Just like reviewing the present performance, it is equally important to review the past performance of a company, especially if it is an old company. Reviewing the past performance gives you a lot of queues about the future performance of the company. You may look at past performance from old records, newspaper articles, etc.
6. Review the balance sheet
The balance sheet is the face of any company. Therefore, before you invest in a stock, examine the balance sheet of the company very well. Analyse the assets and liabilities of the company, look for long term debts, cash reserves and surpluses that the company has. Other things to analyse in the balance sheet are interest payments, level of inventory and research and development expenses.
7. Identify the true valuation of the company
Before you invest, you should always know the true value of the stock in order to ensure that you are not paying excessive money to buy the stock. For this, you can compare the price to earnings ratio (PE ratio) or price to sales ratio.
8. Watch out for any red flags
When choosing stocks, you should always look for any red flags or risks associated with the company which can affect its growth in the long run. You should avoid investing in stocks if these red flags exist – the company does not earn profits, share prices are constantly dropping, excessive debt accumulation in a company, companies with unstable dividend history or dividend cuts, etc.
9. See if the company pays dividend
Companies either choose to distribute their profits to shareholders in the form of dividend or choose to reinvest it for the future growth of the company. But as a general rule, companies paying dividend tend to be less volatile as compared to companies that do not pay dividend.
10. Identify how volatile the stock is
Before you invest your hard earned money in a stock, know how volatile the stock can get. This can be determined with the help of beta. If the beta of the stock is less than one, the stock can be less volatile and if it is greater than one, it can be more volatile to market swings.
The above points will help you thoughtfully weigh your stock-investment choices before planting your hard-earned money on a stock. Moreover, it will make you a better and well-informed investor. Hope this article solves all your questions on how to invest in the share market.