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Five Things You Need to Know About Every Stock You Buy

Five Things You Need to Know About Every Stock You Buy

Stock investing is an excellent way of investing your money. However, it comes with its challenges and learning to negotiate and adapt to these challenges is a prerequisite before investing in any stock. It is not easy being a successful investor without having to experience losses along the way. The key to being a successful stock investor is having knowledge of the market trends by doing thorough research about the stock. Gaining important knowledge about how stocks work and the previous performance of an industry requires extensive research. Luckily there are dedicated professional analysts like the Motley Fool whose market analysis prowess is beyond compare. Failure to do extensive research before investing in stock would guarantee you’ll make raking losses. If you are a beginner who is looking into stock investing, then the following are five essential things you need to know before investing in a stock:

What Do Stocks Do?

There is no way you will blatantly start purchasing stocks without having relevant knowledge of what the companies do and how they make their money. The following are the key ideas to know about a company before investing in them:

What they manufacture.

The kind of services they offer.

The country in which they operate.

How their products are selling.

How the company compares to its peers in the field.

The above ideas will give an insight into the company you are about to invest with and help to shape your decision-making positively. 

Price-to-Earnings Ratio

You can find a company’s price-to-earnings ratio by dividing its market value per share by its earnings per share. The ratios are used to measure a company’s share price relative to its per-share earnings. Here is a simple example of how to understand the price-to-earnings ratio:

Assume, for example, that you are comparing two financial advisors. The first advisor has a reputable track record and has been making people lots of money in the past. There is absolutely no reason why you can’t trust the first advisor with your money because they look promising and have been operational for a long period. The advisor tells you that for every dollar they make, they will give you 60 cents and take forty cents.

On the other hand, the second financial advisor is new in business and has very little experience. However, despite the lack of experience, they promise a higher amount than the first. They tell you that they’ll take 20 cents for every dollar and give you 80 cents. Despite the lucrative promise, you are still in a dilemma about what if the second advisor doesn’t make you as much money as the first advisor.

The above examples demonstrate how to compare the P/E ratios of different companies. P/E ratio comparisons will help influence your decision-making and guide you to invest in a company that’s fast growing in the market.

Beta

It is a tool that measures a stock’s price responsiveness to the changes in the general stock market. Beta measures the risks involved with a company’s stock compared to the stock market. The only way of finding a company’s beta value is through thorough research about the company on google or yahoo. Alternatively, reputable research companies like Motley Fool will give you an insight into the company’s beta value.

Dividend

Dividends are just the same as the interests from your savings account, meaning you get paid regardless of the changes in the stock prices. Dividends are ideal for people who have no time to analyze the stock market daily and still want to make money from stocks. Different companies pay different amounts of dividends to their investors depending on the decision of their board of directors. Before you purchase stocks, you should research the company’s dividend rate and go for one with a high dividend.

The Chart

It would help to familiarize yourself with many stock charts because reading and deriving information from them is not always easy. Take time to acquire the skills of reading the stock charts before venturing into stock investments. The following are the most common stock charts in the market:

Line charts

Bar charts

Candlestick charts

The most common way to read a stock chart is to look at its trend. If an investment chart begins from the lower left and rises towards the upper right, it indicates a profitable company. On the other hand, if it begins from the upper left and drops towards the lower right, it indicates a dropping performance, and you need to run for your money.


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