Not all investors are great and knowledgeable when it comes to picking stocks. Those investing in equities are faced with a tough task; to perform personal due diligence, or if they have an advisor, to evaluate recommendations. Picking the right stock is essential to any shareholder or success of an investor.
When you decide to pick stocks, here are key factors you must consider, to avoid losing money.
Earning potential of the stock
The first thing to consider is the earning growth of the stock you intend to pick. Look for trends in a company’s earnings. Over the years, has the earnings increased? If that is the case, it is a good indication that the company is doing well. You also need to look at the nature of the stock market, what we call stability and volatility. At some point, the company will lose value in the market, but what matters is its long term stability. Any company that can weather the downturns and come back relatively strong, and only seems to have real trouble when everyone else does, would probably be a good bet.
For the company you intend to invest in, how much do you trust the people in charge of managing its resources? Does the leadership of these people promote a stable and long-lasting company culture? How is the company performing? It is innovative and adaptive to disruptions? Are there any indications that show it will be in existence for the next couple of decades? You need to take into account any scandal that any of its top management has been involved in, and the reputation it paints for the company.
Price-earning ratio (P/E) refers to a measure of how well a stock price is doing in relation to a company’s earnings. If we can use fundamental analysis and value investing strategies, P/E ratio is one of the major considerations when deciding to invest in a stock or not. P/E ratio is calculated by dividing the current share price by its earning per share. The higher the P/E ratio, the more likely it is that there will be significant growth in the future.
All companies carry debt, including Amazon, Apple, Facebook, etc. You should never fear investing in a company that has debt, but you need to do more analysis to determine what type of debt is the company carrying. You need to watch out for companies that have high debt levels relative to equity. Divide the total liabilities of a company to the total amount of shareholders’ equity. Those with a low-risk tolerance should have a number that is 0.3 or less.
Many investors look at dividends when deciding to invest in a stock. Ideally, you want to invest in a company that pays dividends, as it has a higher degree of stability. Analyze the trend of the dividends, and see if they are yielding a higher payout from one period to the next. Also check out on dividend distribution as higher dividends may also mean the company is not investing enough.