Many people consider Warren Buffet to be a genius in the field of stock investment. A key piece of advice he repeats to all is that any stock (or company) you plan to invest in should be well established – for ten years, at the very least.
In addition to this pearl of wisdom, there are a number of other factors that you will need to take in to consideration, before you commit your finances to a company’s stock.
Stock Evaluation Techniques:
Below is a guide that will aid you in making such important decisions. It will show you how to see the financial strength of a company, so you will be able to discover and choose a strong, healthy stock worthy of your money.
A Company’s History:
As mentioned above, it is the smarter choice to invest in companies that have existed for at least ten years. A lot can happen in such a significant amount of time, both positive and negative – if a company’s history displays that they can survive a bad financial period, it is a good indication that they can also weather any possible, future downturns.
What are Dividends?
A dividend is a sum of money paid out by the company to its shareholders. It can be dished out at any time during the year, but it is typically done on a quarterly basis. Dividends are especially useful for traders that have long-term investments, as they compound over time.
What is a Market Cap?
Essentially, a market cap is a clear mark of how many sales a company generates every year. It is vital to remember that you should only invest in companies that have a market cap of a hundred million plus – any lower, and there is a risk that the company could financially crash and burn, if times get tough.
Low Cash Flow and Bankruptcy:
Checking a company’s cash flow is a good way of seeing how much profit it makes every year. Banks and other such finance-orientated companies are good choices for stocks, because customers often take out loans or finance, or they place deposits. The higher the cash flow, the lower the risk a company is going to have regarding bankruptcy.
The Price Earnings Ratio (P/E):
Looking at a stock’s P/E ratio tells you what the company’s investors expect from it – if the ratio is between 10 and 30, it is seen as being relatively stable. On this note, if the P/E is high (above 25), that means that the investors believe that it is going to pay off big-time. However, If it does not meet their expectations, then the stock is going to lose its investors, thus decreasing its value, and making it a more unappealing choice for others to invest their money in.
Return on Assets (ROA) and Return on Equity (ROE):
If either of these two are negative or falling, you should reconsider buying the affected stock. If both are stable or are gradually rising over a long period of time, however, it might be a good idea to buy the stock.
Financial Leverage – Investigating a Company’s Debt:
Financial leverage is a good way to tell you how much debt the company currently has in its books: if it’s higher than five, you should reconsider investing in that company.
The only possible exceptions to this rule are banks and other financial institutions – because of their very nature, they typically have a higher ratio than any other type of company.
Finding and choosing the right stock is difficult and tiresome work. Time and patience are essential virtues, as it will take a long while for you to discover and learn the ins and outs of the business.
In the end, however, your efforts will all greatly pay off.
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