In this globalised business environment, persons who wish to invest in stocks and bonds can do so with relative ease compared to 20 years ago. The global appetite for stock investments has been evolving - as more people see the need for investment, more countries open stock markets.
Many people invest and make a fortune, while others invest and lose their money. The difference between the two is an understanding of the need to know the correct information to make the right investment decisions. Thestreet.com has advised that the following are essential questions to answer before investing in stock or financial instrument offered by a company.
What does the company do?
Many investors take business investment advice from their brokers without actually doing the research themselves. It is naÔve to invest blindfolded. If and when you decide to invest in stocks, bonds or financial instruments, make sure you have an understanding of what the company does all around. No one should invest in something they have no idea of. Find out about a company on their website, if a company doesn't have a website; then I don't think they are worth investing in.
Is the company profitable?
No one wants to invest their money in an unprofitable venture, the same holds true for financial investments. Make sure the company is profitable. You can get information on the profitability of firms from their quarterly or annual revenue statements. It is important to chart the firm's net income in actual amount and in earnings per share. Along with knowing the company's profitability, it is important to know:
What is the company's earning history and potential?
If the company has a history of steady, gradually increasing earnings, then you bookmark this company for investment. If the company's earnings are volatile, then it will require more research before making an investment decision. It is important to scrutinise not just a company's earning history, but also its future earnings prospects. For example, in 2011 no one would have predicted that BlackBerry would be an uncommon mobile device in 2016. Stock investment can be tricky. You should have an understanding of what stage of the business cycle a company is in before you invest. If the company is a start-up, booming, declining or liquidating, etc, understanding this will have significant implications on the value of the stock you purchase over the short to medium term.
How does the market value the company's stock?
It is all good and well that a company's earnings are growing, what is also important is the value the market associate with the increase in earnings. If a company's earnings are increasing, but the stock value is not appreciating significantly, then there might be other concerns to investigate. It becomes important, therefore, to ask:
What are the key characteristics of the industry, and who are the competitors?
Understanding a company requires full understanding of the industry in which the firm operates and which contains its competitors. A firm is never independent of the market in which it operates. It is important to know the size of the market share that the firm has. Who is its closest competitor? What impact will their action have on the earning potential of the firm and the value of its stock? Does the industry have dominant market leaders or a couple of market leaders? Or is it an open playing field? Do they have foreign competitors? What is the Government doing to make doing business easier?
Who runs the company?
Stock market investors, though in theory are part-owners of the firm they invest in, don't normally get the opportunity to chat up to the management team and express their vision for the firm. This means you must investigate the leadership of the company to make sure their vision, aspirations and drive for the company is similar to what you expect. Make sure the leader has a good track record and their reputation is clean.
How sustainable is the company's operation?
An avid investor must investigate the long-run solvency of the firm they wish to invest in and examine the balance sheet to verify the company's debt-to-earnings ratio. It is important to understand how much the company spends on research and development annually.
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Published:Wednesday | September 7, 2016 | Dr. Andre Haughton |
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