Stock Investment Do’s and Don’ts

Before breaking down a stock’s numbers and other criteria, look at any stock you’re considering with these five essential ideas in mind:

  • Know What The Company Does

This seems like a no-brainer, right? You’d be surprised how many investors drop good money on stocks that they don’t really understand. But it pays to know precisely how a company earns its money-pick up an annual report and read about the company’s operations, not only will that give you an idea of how reliable its overall business operation might be-companies, after all, can make money in all sorts of creative, strange ways-but you may also find out that it trades in an industry or product with which you’re familiar.

Check out:
  1. Company Operations
  2. Management
  3. Operating History
  4. Revenue Sources
  • Is the Company Headed in the Right Direction?

While you’ve got an annual report in your hands, check out how the company’s sales are doing. Ideally, you’re looking for that number to rise over time. Granted, this is more predictable with established companies than it is with a startup, but growing sales figures are a solid sign that things are on the right track.

Check out:

  1. Sales Trends
  2. Growth
  3. Profitability
  • Is the Company Competitive?
One general rule of thumb when analyzing any stock is to compare its overall performance with other similar companies. That makes for a useful apples-to-apples comparison. For instance, y9ou may discover that a company with an attractively priced stock has a higher growth rate than other companies in its field. By the same token, you may also find that a company is lagging behind its competitors. As we’ll see later, ratios are a great way of making these sorts of important comparisons.
Check out:
  1. Sales versus competitors
  2. Profits versus competitors
  3. Growth versus competitors
  • Look at the Company’s Finances
A company maybe selling its product faster than it can manufacture it, but if the debt incurred by those manufacturing costs outpaces sales, that company may be headed toward a cliff. That said, look at a company’s overall financial health-debt, spending patterns, and the like-to get a feel for how well the company may be managed. We’ll tackle this in greater detail in the next section covering the income statement and balance sheet.
Check out:
  1. Debt
  2. Assets
  3. Major Expenses
  • Don’t Stop with the Annual Report
Although annual reports can be a great starting point for analyzing a stock, bear in mind that they represent a major public relations effort. Companies spend a lot of time and money to make the report as flattering as possible. Take what you read with a grain of salt and with the determination to include other information sources in your decision.
Check out:
  1. Ratios
  2. Analyst Reports
  3. Stock Price Movement

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