So, you are thinking about investing in stocks.Great! Learning how to invest is a fantastic way to expand your financial knowledge but, at the same time you just don’t want to go and buy stocks randomlyit’s very important to make sure you understand what you are buying and the factors that can influence stock priceHere is a good checklist to go through to make sure you are making the right decision before purchasing a stock
Tip 1 – UnderstandWhat the Business You Want to Invest in Does
Obviously one of the most important things you need to do before buying a stock understanding what the business actually doeswhile you might think you understand what a company does, there is always a lot more than meets the eyeso how can you learn more about what a business does?
First off, you can check to see if they have an investor presentation on their website. These are great because they usually give a very high-level overview of businessat the same time, another great resource to read is the company’s 10-K filing, also known as its annual report. This is an SEC mandated filing that covers everything from what the business does, to its financials, risks, etc. You can find this by doing a search over at sec.gov.
Tip 2 – Understand A Company’s NumbersInside and Out
Remember, when you are buying a stock, you are buying a piece of a business. So, it’s very important actually understand how much money the business makes. this takes a little bit of knowledge on the accounting side of things. Every publicly traded company is required to file its audited financial statements every quarter on the SEC website like I mentioned before.
Statements are the income statement, the cash flow statement, and the balance sheet understanding all three statements is crucial in analyzing stock for the first time
Tip 3 – Understand the Valuation of The Company You Want to Invest In
Do you like over paying for things?Absolutely not! The same should go for when you are buying a stock Wall Street analyst use a variety of different valuation metrics to analyze whether a stock is cheap or expensive common metrics include price to earnings ratio (aka P/E), the EV/ EBITDA ratio, and for tech companies, even EV/Sales. It’s very important to understand whether company is currently overvalued or undervalued, and using the metrics mentioned above is a great way to analyze that.
Tip 4 – UnderstandA Company’s Management Before Buying their Stock
If you are familiar with sports, then I’m sure you understand the importance of a team’s coaching staff. The same goes with stocks it’s very important to understand the management team behind the company and their motivations:
For example:
- Are they taking a decent salary? Or are they over paying themselves?
- Do they own a lot of shares of a stock? Or do they own very little?
- Are they currently buying shares in the market? Or are they selling shares
A good way to see that is using insidertracking.com. At the end of the day you want to be on the same page as the management team, because if they don’t own a lot of the stock and maybe they are taking a large salary, they won’t care very much about the stock price.
Tip 5 – Understand What Wall Street Thinks About a Stock
You have probably heard of Wall Street analysts beforewhat do they do? If you’re looking for How To Get a Job on Wall Street there are great guides out there. But if you’re the average investor you need to rely on the information the street puts out so watch the analysts. Their job is to analyze companies and place price targets on each stockso, each analyst will have their own opinion on the stock and weather or not it’s cheap or expensive why is this important to understand? Because it will give you an idea of what the market currently thinks of a certain stockso, if a bunch of analysts have low price targets on a stock, you can get the idea that the market has a negative sentiment on the stockon the other hand, if a bunch of analysts have high price targets on a stock, you’ll get the idea that the market has a positive sentiment on the stockby understanding this, you will get an idea of which side of the argument you are on prior to buying a stock.