Before you buy that stock, you should have the proper knowledge about it to ensure that your money won’t be wasted.
What the Company Does
It is a well-known advice that investors should not buy a stock unless they have a comprehensive knowledge of how the company issuing the stock makes money. In other words, never forego checking out the company’s business model.
Know the following:
- The things the business manufactures
- Its services
- The countries in which it operates
- Flagship product and its performance in the market
- The business’s status in its sector or industry
Such information is usually easy to find. Find the company’s official website and seek answers to these questions.
Beta
You would think, at first, as if beta is very difficult to understand. However, it’s not that complicated when you learn about it.
Beta measures the volatility of your company’s stock for the last 5 years. Consider the S&P 500 as the foundation of the stability of the stock. If the company’s stock drops or increases in value over the last 5 years, it has a higher beta, meaning higher volatility.
Any beta that’s higher than 1 is considered volatile, therefore risky. A beta that’s lower than 1 is considered less volatile, therefore less risky. A lower beta means that the stock doesn’t react to the S&P 500 movements as much as others. These stocks are called defensive stocks. You won’t make much money in the short term, but that also means you don’t have to watch it every day and you won’t lose much.
You have to watch higher beta stocks closely because they have the ability to make you lose your precious money, even though there’s also the equal probability that you can make money by investing in them.
Dividend
If you don’t have the spare time to watch the market every day and you still want your stocks to make money without having to exert too much attention, search for dividend stocks.
Dividends are like interest in a savings account—you receive payments regardless of the stock price. Before you buy a stock, look for the dividend rate. If you simply want to put your money in the market, you can invest in stocks that pay high dividends.
Charts
Leaning to read a chart is a skill that requires time and patience. However, basic chart reading takes little skill. As what a famous TV personality said, if the stock’s chart starts on the lower left and ends on the upper right, you can say that that’s a good thing. If the chart looks like the opposite, it’s probably best to back away.
There are thousands of stocks that you can choose from without picking one that is losing money. If you really have the belief in this stock, you can just merely put it on your stock watch list and check on it some other time.
Price/Earnings Ratio
The P/E ratio can be found by comparing the current market price of the cumulative earnings of the last four quarters. You then compare this number to other companies similar to the one that you’re researching.
If it has a higher P/E than other similar firms, there should be a good reason. If it has lower P/E but it’s growing fast, you can take a shot at that investment.
