Investing in the stock market can seem daunting to people who’ve never invested before. That’s why we’ve listed a few things that every first-time investor should know.
Do Your Homework
When you try your hand at stock picking, it’s important to do your homework. Your goal is to find good value, especially if you plan to hold on to assets for a while. Before you put full faith in a company, you should always do thorough research, and review a stock’s fundamentals to monitor its viability and to check if it still has room in your portfolio. This isn’t a simple purchase. You are becoming a shareholder of a company, so do your due diligence.
Look for Trends in A Company’s Earnings Growth
Do the earnings generally increase over time? If yes, it’s a pretty good indication that the company is doing something right. Even small, regular improvements over a long time can be a positive indicator. But earnings growth and value should go hand in hand for the stock to be worth the investment. Evaluating a company is a mix of understanding of how the business works and how valuable its future cash flows are.
Look at an industry that is represented in the market and then establish if there is future growth potential. The industry can be a great screener when investing, however, when picking individual stocks, you need to look at where the company fits in. Also, check how it fares against its competitors.
All companies carry debt and investors can use this information when checking the company’s financial well-being. Watch out for organizations with high debt levels relative to their equity. To find this, divide the total liabilities of the company by the total amount of shareholder equity. For people who have a lower risk tolerance, this number should be 0.3 or less.
The price-to-earnings is an evaluation metric that measures how well a stock’s price is doing relative to the company’s earnings. This ratio is typically an excellent indicator to whether a stock is undervalued or overvalued, giving insight into a stock’s worth according to financial markets. To find this ratio, divide the company’s share price by its earnings per share.