Five Basic Questions to Ask Before Buying Stocks

It is a given fact that you should research first and get all the necessary information before you invest your hard-earned money on a company’s stock. But of course, many people won’t do it because of so many reasons. However, a well-informed investor can decide better on which stocks to buy.

Here are some questions that you need to answer before you make decisions.

1. Do you understand the company’s business?

It may sound simple but its is one of the important things that you need to know. Even one of the successful investors, Warren Buffett, said that he would not invest in a company that he doesn’t understand. And although this sounds simple, it doesn’t mean that it is easy. For instance, you need to find the answer through thorough background check or their annual reports.

2. Is it run by a management you trust?

It may look hard to know the company’s leaders and managers because individual investors don’t have the ability to drop by a company’s headquarters and have a chat with the management. But don’t worry, there are some ways to know them. Visit their website and LinkedIn profile. You can see there the list of senior managers, how long they are working in the company, and their background.

3. How profitable is it?

It may look simple again but you should look on how efficiently the company makes money. Using measures like return on equity and return on assets will show you how efficiently the company allocates its finances. You can also read the quarterly and annual earnings report to know how much net income the company reported.

4. How fast the company is growing?

Stock prices are driven by earnings growth over a long period of time. If the revenues are increasing then it’s a good sign that the company is successful in managing their business. What helps them achieve it? Do they have a better-than-average product or they are good in sales?

5. Is it worth the price?

You should not buy stocks because it’s cheap. Remember to buy cheap stocks that has quality. To figure if it’s worth it, you can use the price/earnings ratio (P/E) or the price/book ratio (P/B). Whichever you use, compare the results with other companies in its industry and in the market as a whole.

Answering these questions won’t guarantee that you will get a winning stock but at least you make your journey less risky. Either you buy stocks abroad or start value investing in the Philippines, you should do your research intensively.