The stock market lures almost any investor looking to grow his profits. But this market is pretty similar to embarking your finances on a roller coaster. You are constantly going up and down and you never know when you are going to get sick from all the motion. The stock market is a very profitable and yet risky business. It can easily make you very rich or very poor in a blink of an eye.
That is why it is important to properly do your homework before risking all your hard earned money by investing it in the wrong stocks. It is the same as with any other investment: a house, a car and so on. You first do your research and then you buy.
This article will give you some pointers on how to research, analyze and choose the best stocks.
- Determine what kind of investor you are and what your expectations are. There are several types of investors, based on their main focus: there are the ones that are mainly preoccupied with income and usually choose low-growth businesses in areas such as utilities and there are investors who are mainly focused on preserving their capital and who like to keep the risk to a minimum so they put their money into stable corporations. You should know what type you are and what your goal is before you invest in the stock market so that you will have a better idea of what kind of investment you are looking for
- Always stay updated and informed about financial news. Read magazines, watch the news and always stay in the loop so you’ll be the first to find out about any great opportunities, important changes and so on
- Start browsing for potential companies to invest in by doing an industry screening using ETF (exchange-traded fund). Choose a certain industry and simply type ‘industry…ETF. This way you can see each company’s holdings and go from there and filter stocks based on different criteria
- Do a thorough analysis of the company you want to invest in. Read its annual report, learn about its history, how old it is on the market, if it is profitable and constantly growing, does it have any debts, is it involved in any legal disputes and so on. Check the company’s website and watch their presentation to learn more about it. You might also want to consider hiring a professional to help you decipher all the financial information, graphs and numbers for you, if you don’t feel you can entirely grasp everything on your own
- Choose stocks that have a large margin of safety. The margin of safety refers to the downside risk of a stock. You should aim for stocks that have a large margin, meaning they are safer
- Analyze and pay attention to the company’s P/E, debt ratio and free cash flow. P/E means price to earnings ratio and it is best to avoid companies that have a negative ratio, as that might mean that certain business is not very profitable. The free cash flow is the amount of money the company actually has to invest in various opportunities. You should aim for companies with a solid free cash flow. The debt ratio measures the ratio or percentage of total debt to total assets. The higher the debt ratio of a company, the riskier it is to invest in it.