Investors, especially retail investors, end up losing money while investing in stocks, but apparently, this is because not many of them know what stocks are about. Investing in stocks is not an action that investors should do blindly. One of the key methods to becoming a successful investor is to conduct enough research concerning any asset you wish to add to your portfolio, including stocks.
Know About the Stock You Want Invest In
Suppose there’s one mistake retail investors make when investing in any company’s stock. In that case, it’s investing without knowing what the company is about. It means that they make investments blindly. As part of your research, one thing to do is know the company. What does this company do? How does this company make a profit? These are determinants to knowing if it’s even working if investing in such a company. New investors’ mistakes cannot be seen in most veteran investors.
Some companies already have well-established businesses; these companies know how they make money and what they do to keep themselves going. These are the kind of companies’ stocks to invest in; some of these stocks include KO from Coca-Cola and MCD from McDonald’s Corp. If you wish to know more about what any company does before investing in their stock, you can by going to your browser and type in the company’s name.
Know What Financial Ratios are
If, as an investor, you want to know what a company is about before investing in its stock, it’s a good thing to know its financial ratios.
What are financial ratios? These are numbers gotten from a company’s financial statement. The financial statement helps one to know about the company. A company’s financial statement can come in its balance sheet, income statement, and cash flow statement. These documents will help you as an investor have a good knowledge of how the company is being managed and the financial history of such a company. The company’s financial ratio includes its stock liquidity, leverage, profitability, and market value.
Keeping an Eye Out for Value Traps
You might be wondering what value traps are as a new investor. Value traps are stocks that have their prices lower than other stocks. Such stocks attract investors more because of their cheap value; however, they might be dangerous to investors. To understand this, take this example – A man wants to invest in a business, and he comes across two. The first is well-known, and investing in their business will give you a profit of 60 percent in the end while the company keeps 40 percent. The second company is offering him 80 percent, and they are taking 20 percent. The second company has a low success rate, while the first is already a successful company.
New investors will most likely go for the company offering them a higher percentage even though there’s no guarantee that that company’s stock will rise anytime soon. It is better to invest in a stock that already has a high-value price.
Avoid High Dividend Return Stocks
Most new investors will go for stocks with a high dividend. Dividends are returns or profits that companies offer their clients. The high dividends are traps that these companies use to attract newbie investors. To be sure if the high dividend is real, investors can calculate such companies’ payout ratio. The formula for payout ratio is (a company’s yearly payout ratio divided by its earnings). If the answer is more than 100%, then it means that the company might not be sustainable enough.
Check Activities from Within
Another way to go about having enough information before investing in a stock is by checking its activities from within. How can this be done? Investors who want to invest in a particular company’s stock can do this by checking the number of the management team that invests in the stock. The transaction should include buying and selling of that company’s stock. This way, the investor can know how the stock will pick up. If the insider investment is much, it gives the courage to outside investors; where it is low, this is a red flag telling you to avoid the stock.
The Term of the Company’s Success
Warren Buffett once mentioned that a company’s ability to remain successful for over decades shows its strength in the market. For example, for over a decade, Coca-Cola has remained a soft drink distributor, even with competition. The ability of Coca-Cola to remain one of the best companies even with other competitors is a green card. Besides Coke, other companies like this are Amazon, Google stock, e.t.c.
Not many companies can keep up for such a long time. So by the time you see a new company offering a high yield for investing with them, you will have to think if a competitor will not phase the company out.
Understanding the Risks Involved in Market
This is another way to avoid careless investment in the stock market. The truth is no matter how advantageous or strong a stock pick is, it is still prone to risk involvement. Risk is something that cannot be avoided while investing in any asset. What should separate you from an average investor is knowing there are risks and how to calculate these risks. Have you heard of beta? Beta is the measurement of risk for a stock in the market. The stock market has a beta of 1. Whenever the stock exceeds 1, the risk involved in that market will be higher than what is already in the market while moving in the same direction. The risk will be high when it is equal to 1, but not when the beta is higher than 1.
Understanding how the risk in a stock market is will help you as an investor invest in a more careful stock.
For any asset you wish to invest in, the best thing to do is still for you to carry out extensive research. This helps you reduce the number of risks involved. You also know the right stock to add