7 Checks To Do Before Investing In A Company
It is important that proper checks are carried before one invests. The more informed decisions one takes, the better are the chances of getting a sizeable return. There is a difference between trading and investing. When you trade a company’s stock, you focus more on the changes in stock prices. However, when investing in stocks, your goal is to find value in the company’s business and its projects. Do you think you are ready for investments? Is it the right decision for you?
Here is our 7-step checklist before investing in a company
1. Make a personal finance blueprint
Before investing in a company, you need to make a personal finance blueprint. Why do you want to invest? What is the amount you can invest? Do you want to invest in a lump sum or opt for smaller monthly investments? What is your risk appetite? How much return are you expecting? These questions need to be answered by you, clearly and precisely.
2. Pay off your debt
Rising cost of living is raising household expenditure. Debts- including mortgages, credit cards and student loans have burdened many citizens. Do you also owe debt? Do you have a road-map for paying your debt off? With a limited income, it can become difficult to invest. However, you should not wait till your debt is finally over. The sooner you start investing, the better returns you get. So, make a plan to pay all your debt and invest accordingly.
3. Set aside a comfortable investment amount
If you are using your life’s saving for investment, you are on the wrong track. Instead of doing this, you should be setting aside a comfortable amount for investment. No matter how small the sum, you should not push yourself past the comfort zone initially. Only invest the money you are ready to lose. Of course, the chances of losing 100 percent of your investment are low. Still, you should be cautious.
4. Look for profitable sectors
Instead of sifting through a list of countless companies, it would be better if you look for the most profitable sectors. Energy, technology, bio-pharmaceuticals are sectors that have the most exciting stock picks. Learn about the sector, its intrinsic values, and its future. Then look for leading companies in the sector and invest.
5. Keep stock charts nearby
Quality checks before investing are essential. Use stock charts to check if a company is really profitable. Stock charts help you in understanding share price trends of a company’s stock. Essentially, it gives you important data about the company’s performance, its EPS, and even dividend yields.
6. Earnings reports and balance sheets
Before investment, check the company’s balance sheet and latest earnings report. The sales and revenue figures of the company can give you an accurate indication of its financial health. On the balance sheet, note cash available with the company and match it with the debt. A company with looming debt, even with good sales numbers, is a dicey investment. On the other hand, a company with reasonable sales but good cash flow is a better deal.
7. Check important ratios
The P/E ratio is one of the most important ratios to check before investing in a company. The P/E ratio, also known as the price-to-earnings ratio suggests a company’s profitability to investors. It defines the capital investors need to inject into the company to earn a dollar of its profit. You can also look for Return on Investment (ROI), Return on Assets (ROA) and other numbers to define a company’s profitability.
Performing these 7 steps before investing will help you become a better investor. While you must start as early as possible, do not act in a hurry. Base your investment plans on your unique financial health and slowly try to make it work in your favor.
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