If people don’t have any experience investing on their own getting started can be difficult. It is very difficult to determine how much money should be in stocks. What type of stocks we should look for. Further what mistakes we should avoid etc. Keeping that in mind there are certain things all investors should know before buying their first stock.
Following are the important factors one must consider before making an investment:
To find the percentage of portfolio
The first thing one should know is that how much of his/her portfolio should be in stocks. One should know that once they are closer to retirement they should reduce their investments in stocks in order to secure their capital. To find the percentage of portfolio that should be invested in stocks one must take their age and subtract it from 110 and must adjust this up or down depending on the risk taking capability.
Research about the company
The person who is going to invest money should know what the company is doing. The person must check company’s site, company profile, their ventures, upcoming project etc. The person should know the company in and out in detail. The next thing they should do is to check whether the company is a profit making company or not. There might happen sometime that the company may show profits for last year but in the current financial year they are making loss, so we should keep a note of that.
Financial statement of the company
After doing a company’s background research the investor now must check the company’s financial statements of past four quarters. This data will help the investors to know if the company is performing well or not, is the growth of the company steady etc. The investors should also refer to the Annual Reports of the company, to see what the future plans of the company are.
Company valuation
For an investor it is always wonderful to find a company whose earnings are growing at a good rate, but the investor must have the knowledge about what, value the market pays for that growth. These factors of future growth are determined by looking at company’s valuation. It also includes price to earnings and price to sales. P/E ratio helps the investor to know how much they have to pay for a stock.
Balance sheet analysis
Investors who are willing to invest for a long term should be able to read a company’s balance sheet. They should look if there is huge amount of debts as compared to how much it revenue it earns. An investor should not look at company’s income statement alone. To see if the company has borrowed too much to achieve respected earnings. Studying the balance sheet is useful as it helps to know how much the company is spending on its research and development and how large its inventory is.
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