5 Things To Check Before Buying A Stock
Cryptocurrencies, stocks, mutual funds are some of the most prominent investment mediums for people. Everybody thinks of entering the stock market at least once in their lifetime. It is imperative to understand everything about the stock, the company, the timing, etc. Many people are afraid to do so because of the high risks and lack of research before investing your hard-earned money. Your goal must be to find a reasonable value if you are willing to invest in stock for a long term. Here are 5 things that you must check about the stock before buying.
1. The Time Horizon:
Prior to purchasing a stock, you should determine your investment time horizon. Time plays a crucial role in determining whether a stock is profitable for you or not. The time horizon is the period of investment, which is divided into three terms, short, middle and long term.
- Short Term – Any investment which you have intended to own or maintain for a period of one year.
- Medium Term – Any investment which you have planned to own or hold for more than ten years.
- Long Term – Any investment which you have planned to own or hold for more than the period of ten years.
2. Investment Strategy:
Investors around the globe prominently use three types of strategies when it comes to investing in stocks, but these may vary from person to person.
- Value Investing: Investment in stocks which are undervalued. A strategy used by Warren Buffett.
- Growth Investing: Investment in stocks which have market bearing growth in terms of revenue and earnings.
- Income Investing: Investment in stocks which pay significant dividends.
3. Checking The Fundamentals:
Investors are advised to check fundamentals of any stock before buying it. Investors like Warren Buffett have always advised fellow investors to compare the current market price of the stocks to their fair market value. Some of these fundamentals include:
- P/E Ratio: Price to Earnings Ratio is the stock’s price with the company’s earnings per share.
- Debt to Equity Ratio: Debt-to-Equity Ratio helps to know how much debt the company owes. The higher the debt level, the higher the chances of bankruptcy and the lower the chances of good returns.
- P/B Ratio: Price-to-Book Value Ratio compares the stock’s price to the net value of the assets which are owned by the company.
4. Comparison Of Stock Performance To Peers
You should compare the performance of the stock with that of its competitors and peers prior to investing. There are several websites which can provide you with this kind of data.
5. Shareholder Pattern
Stock purchase decisions are influenced by a company’s shareholder pattern. Shareholders of any company have major influence over its activities and business. For instance, in some cases the controlling stake of the company is owned by the promoter. Invest in companies with high promoter holdings, high domestic institutional investor holdings, and also high foreign institutional investor holdings as an investor.
For a beginner, the stock market can look like a make or break game. While the new generation has an active interest in investing and earning money through cryptocurrencies and the stock market.
There are many influencers on social media who provide accurate guidance on such topics, whom you can look up to for advice. You should do everything you can to understand how the stock market operates.
You should also understand which stocks and companies you must invest in depending on your time horizon, investing strategy and investment budget.
Moreover, we are not financial advisors but a group of industry experts who are driven to provide guidance to the people stepping into the investment journey for the first time.