10 Important Moments to Pay Attention to When Investing in Stocks

Investing in stocks is a big decision to make, and you should do your research carefully before putting your hard-earned dollars on the line. The stock of your choice must offer you decent value, especially if you wish to invest for the long haul.

Investing in stocks is not only all about buying equities of some company and waiting for the right day to come, so you can sell your assets and roll in cash. Instead, by investing, you actually become a shareholder of that organization, and a wrong investment decision can cost you dear.

Investing in stocks is not only all about buying equities of some company and waiting for the right day to come, so you can sell your assets and roll in cash. Instead, by investing, you actually become a shareholder of that organization, and a wrong investment decision can cost you dear.

So, if you want to stand to gain from such an activity, here are some key things to check before pouring your precious money into stocks.

Length of Investment

First, you need to decide on the longevity of your investment. Investment periods can be short, medium, or long-term.

  • Long-term. Such investment is supposed to be held for over a decade. These investments have sufficient time to recover after a harsh marker crisis and can bring significant profits over years.
  • Medium. They are investments that you hold from 1 year to 10 years. If you gravitate toward this strategy, you should invest in well-performing emerging market stocks and moderate-risk stocks.
  • Short-term. It is a span of time wherein you invest for a period of up to one year. If you plan to buy stocks and hold them for less than a year, then your best bet is to invest in top blue-chip stocks that have a proven history of continuous growth and are highly appreciated by both customers and market analysts. These companies have a long track record of increasing revenues and lucrative dividends. They also implement robust risk management practices, enabling them to withstand economic contractions and deliver the most reliable long-term results.

Investment Strategy

Before purchasing stocks, it is essential to delve into various investment strategies and adopt the one that fits your investing model.

Here are three main types of strategies trusted by many modern investors:

  • Investing in growth: this is an investment scheme under which, you buy stocks of a company that shows a substantial growth of revenue. Growth investors think that the company of their choice will continue to grow and enrich, so that their stocks will bring hefty profits, too.
  • Investing in income. Under this strategy, investors pick stocks that offer high dividends. These dividends can then be withdrawn and used as an investor pleases, or reinvested for even greater earnings.
  • Investing in value: is a type of investing in stocks that are considered undervalued compared to their peers in the hope of making a profit. This is a favorite strategy of famous Warren Buffett who uses it to capitalize on stock investing.

Mind Some Ratios before Investing In Stocks

Prominent investors have come into big money by comparing the current market price of stocks to their fair market value. Such investors hope that undervalued stocks will ultimately reach their fair or intrinsic value, and investing in them will one day make you filthy rich.

So, consider researching some key metrics before buying stocks:

  • Debt-Equity ratio – it helps determine the amount of a company’s indebtedness. High-debt levels are red flags because they signal business failure.
  • Price-to-Book (P:B) ratio. This index compares the price of a stock to the net worth of the company’s assets. It is calculated by dividing the company’s stock price per share by its book value per share (BVPS). P/B ratios below 1 are generally considered a safe investment.
  • Price-to-Earnings (P:E) ratio. It shows the relation between the market value of a stock versus the company’s earnings per share. To calculate the P/E value, you just need to divide the current share price by earnings per share (EPS). A high P/E ratio indicates that a company’s stock is overvalued and may promise high growth in the future.

Stock Performance

Investors should also analyze how stocks perform compared to their peers. Platforms like Google Finance provide real-time market quotes, the latest financial news, and expert analytics to help you make data-driven investment decisions. Investors can leverage this information when it comes to selecting the perfect stock for investment.

Mutual Funds Holding

Stocks owned by several mutual funds are usually considered safer investment choices compared to the stocks that don’t belong to mutual funds.

Company Capitalization

The size of the company you plan to invest in plays a critical role in evaluating the amount of risk you are taking when buying the given stock. Therefore, a good rule of thumb is to consider the company’s size versus your risk tolerance and the length of investment before purchasing stocks.

Generally, the size of a publicly held company is measured through its market capitalization. Market cap data is available at many websites that offer stock trading services.

Shareholder Pattern

It is always a wise move to learn about the shareholding structure before investing in stocks.

Promoters are shareholders who can influence the company very much. Promoters can have the largest portion of the controlling block of shares in the company or occupy senior positions. The amount of promoter’s stake in total shareholding is a key indicator of a company’s reliability. While a higher promoter stake shows the prosperity of a company, lower promoter stakes can signal that there are some issues with this organization.

However, a very large share of promoters in the company’s shareholding is not favorable, while a very low share may violate the interest of investors. Thus, a diversified holding is considered the most beneficial pattern for investors, wherein shareholding is distributed among domestic and foreign institutional holdings (presented by governments, corporations, banks, and financial institutions).

Dividends Record

Dividend stocks pay a portion of their profits to the investors.

Investors who choose an income investing strategy should consider investing exactly in dividend stocks. If you desire to reap profits from your investments, you should investigate the company’s dividend record before investing in it.

Revenue Growth

When buying stocks, one of the safest paths to follow for an investor is to choose growing companies. A growing company is enjoying a steady increase in both the amount of business and earnings.

Volatility

High-volatility stocks may spike in price on bullish periods and fall drastically on bearish periods.

If you are investing in a low-volatility stock that doesn’t move much and its recent upward trend is reversing, you should better withdraw your gains before it’s too late, otherwise, all your profits may just melt.

On the flip side, stocks that demonstrate quick moves don’t give you much time to get rid of your stake in a company, and when the trend reverses, you may end up facing financial losses.

Stocks may present a powerful addition to your investment portfolio if chosen properly. To stay on the safe side and avoid money losses, you should only pick tried-and-true companies with a steady performance.

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