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3 Main Tips for Choosing Stocks to Buy

 

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How To Buy Stock 3 Tips

The stock market is an investor’s paradise due to the wide variety of stocks available for trade. With thousands of stocks available, choosing the right stock to invest in is one of the main challenges investors face. If you want to start building an investment portfolio, buying individual stock comes with risk but promises you greater returns.

When it comes to picking stocks, doing it yourself allows you to save money. This is in comparison to paying fund managers whose task is to pick stocks for you. When you are buying a stock, keep in mind you are owning a part or a share of the company. While your stock might gain with short-term movements, your investment’s value depends on the health of the company. Below are tips you should consider when choosing stocks to buy:

Buy familiar stock

When you want to start stock trading, the best shares to buy are those from a company or industry that is familiar to you. Knowing a company ensures that you are better placed to make sound judgment when it comes to investing in it. Keeping your investment in line with your interests is also important. The company should be in an industry of interest to you, and one that you want to be a part of.

There are cases where you might not have sufficient knowledge of a promising company. To make a good investment decision, research to know more about its operations and earnings reports.

Consider stock valuation and price

When considering a stock to invest in, seasoned investors look for undervalued stocks. When a stock is undervalued, investors are paying low prices for every dollar earned by the company. This is the price-to-earnings ratio, also known as P/E. A company with a P/E lower than 15 is undervalued or cheap, while one with a P/E more than 20 is expensive. Companies with rapid growth have expensive stock compared to those with slow growth.

Comparing the P/E of a company to that of other companies in its industry will help you know which stock to choose. However, going for cheap stock is not always a good investment decision. Cheap stock could mean a company is slowing down and expensive stock could mean a company’s projected earnings are expected to grow. It is advisable to purchase stocks that have growth potential. Therefore, consider both value and expected future earnings.

Weigh a company’s financial health

Before buying any given company’s stock, dig into its financial reports. Public companies are required to release their quarterly and annual financial reports and file them with the Securities and Exchange Commission (SEC). Instead of focusing on recent reports, focus on all their past reports to identify whether they have good financial health and profitability over the years.

A company’s revenue growth plays a major factor in determining the price of its stock and its attractiveness. Some investors are hesitant about investing in a certain stock due to short-term events. In the long run, share prices increase when companies are making money. When considering a company’s revenue do not forget to consider its bottom line. The profit margin of a company is determined by the difference between its revenue and its expenses. When a company has grown revenue and controls its costs, it gains margins. This makes its stock more valuable in the long run.

What it means to buy into a company

Buying into a company means buying into a part of its earnings, losses, and debts among other things. Evaluating the debt of a company is important before purchasing its shares. When a company has high debt, its share price is likely to be volatile. This is because most of the company’s income is channeled to debt and interest payments. To know if a company’s borrowing is unusual for its size and industry, compare it to other companies in the industry.

Stock investors receive cash payouts called dividends. Dividends are not only a source of income to a shareholder but also a sign that the company’s financial health is good. Consider the history of a company’s dividend payments before buying stock. Has the company increased its dividend yield? If they have, find out the margin. If not, find out why.