Investing in the stock market can be a great way to grow your wealth over time, but it’s important to approach it with caution and careful consideration. Before you invest in any stock, there are a number of questions you should ask yourself to make sure you’re making a sound decision. In this article, we’ll discuss 10 questions to ask before investing in any stock.
1. Is the company profitable?
Businesses with higher net profits enjoy a much better risk-reward profile and hence the the net-profit ranking suits investors the best. Profit is “money in the bank.” It goes directly to the owners of a company or shareholders, or it is reinvested in the company.
2. How strong is the company’s balance sheet?
Balance sheet depicts a company’s financial health. It records all your business’ assets and debts; therefore, it shows the ‘net worth’ of your business at any given time. Company with a strong balance sheet are more likely to survive economic downturns than a company with a poor balance sheet.
3. What does company do?
Buying stocks of the company means one is buying proportional ownership in the company. Hence understanding a company before buying its stocks is essential. Ownership in a company comes with its share of risk and reward. Hence we as an investor need to tune our expectations (from stocks) accordingly.
4. How was the past performance of the company?
While you need to value the assets of a business, past profits are often the best indicator of the business’ overall value, says Wise. You can use past profits to predict future earnings, by looking at the current and past financial statements.
5. How is the stock valued?
The importance of valuing stocks evolves from the fact that the intrinsic value of a stock may be different from its current price. By knowing a stock’s intrinsic value, an investor may determine whether the stock is over- or undervalued at its current market price.
6. Any involvement of the management in any past fraud/scams?
Management’s responsibilities include creating an environment where fraud is not tolerated, identifying risks of fraud, & taking appropriate actions to ensure that controls are in place to prevent & detect fraud. But if management itself is involved in any kind of fraud then it will make the roots of company weak and your investment may suffer losses.
7. Who are the key competitors?
The purpose of a competitor analysis is to understand your competitors’ strengths and weaknesses in comparison to your own and to find a gap in the market. Knowing who your competitors are, and what they are offering, can helps company to make their products, services and marketing stand out.
8. How much debt the company has?
A company can have more debt than its assets. A debt attracts interest. Hence, higher debt and/or longer tenure implies more money lost towards interest payment. This affects the profitability and growth of the company.
9. Does the company have a sustainable competitive advantage?
Sustainable competitive advantage occurs when a company consistently outperforms its competitors in the same industry or field. Most often, companies with this type of advantage create a value for their customers that’s superior when compared to other businesses. Sustainable competitive advantages are difficult to duplicate or replicate.
10. Promoter check?
Always read about the people who are running the company. Find out their background and how long they have spent with the company. Frequent changes in the top management, inexperienced top managers may be poor indicators while picking the right stock.
Investing in the stock market requires careful consideration and a thorough understanding of the companies you’re considering. By asking these 10 questions before investing in any stock, you can help ensure you’re making a sound investment decision that aligns with your goals and risk tolerance.
Resource: A thread by Preksha Baid
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