4 Things to Know About Every Stock You Buy

Seeing headlines about wild investment successes can make it seem like buying stock is easier than it actually is. With so many people trading, there will obviously be people who get lucky. But it’s a mistake to bank on good fortune — it’s a far more sustainable strategy to research the following four essential things about every stock before you buy. This way, you can move forward confidently knowing that you’ve made a wise investment.

The Company’s Background

 

 

 

 

 

 

 

Image via Flickr by Semtrio

A company’s background often tells you the most important details about its potential for business growth. This typically includes this information:

  • How long the business has been operating.
  • Its financial history and success year over year.
  • Its short-term growth plans.
  • Milestones that the enterprise has reached and the problems it overcame to get there.
  • Why the business started.

These details give you hard data about how the business has performed. It also lets you know about the company’s philosophy and leadership, which is a priority for many investors.

The amount of information you can find on a company will vary. It also depends on which type of stock you want to buy. For example, if you’re researching options for penny stocks, you’ll find that most companies offering shares for $5 or less don’t have an established financial history.

The Company’s Industry

Some investors choose to specialize in a particular industry and look for businesses to back in that field alone. Others use a wider lens, searching for potential opportunities wherever they’re available. Either way, it’s worth considering the intricacies of an industry to determine whether a business will succeed in that field.

For example, consider the growth of the cannabis industry in light of ongoing legalization and decriminalization trends across the U.S. In your search for the best marijuana stocks, you’d have to keep industry-specific factors in mind, such as:

  • The company’s licensure.
  • The company’s niche — i.e., whether it’s a dispensary, a manufacturer of equipment for dispensaries, or something else.
  • The state where the business operates and the financial projections in that area.
  • Community support for the enterprise — i.e., whether a business is in an area where cannabis use is not only legal but also likely to thrive.

Overall Financial Chart

A chart outlining the company’s overall financial history is easy to read and will tell you a lot about the enterprise. Basically, you want to back a business that’s making money — so, the chart should be steadily increasing from left to right, showing growth over time.

Of course, ups and downs do happen. If you notice a weak quarter, check the company’s background information for details about what went wrong, how the business recovered, and what plans exist for avoiding a repeat of that issue.

The Price-to-Earnings Ratio

The price-to-earnings ratio is a simple calculation that compares a stock’s price to the company’s current earnings. Use this information to compare investment opportunities.

Thoroughly understanding each of these things will let you know whether a company is likely to succeed in the short-term and for years moving forward. Before you ever purchase stock, you should always know a company’s background, the specific constraints of its industry, its investment chart, and its price-to-earnings ratio, among other essential details.

 

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