5 Things to Consider Before Buying Stocks

September 20, 2022

 

Building a successful business is one of the best ways to achieve financial freedom. Nonetheless, this does not mean that you should stop exploring other opportunities to boost your income. The options abound, and one that you might want to consider is investing in stocks.

Buying stocks, however, isn’t a straightforward process, especially for newbies. Read on and we’ll share some tips to help you make the right choice!

 

Essential Considerations When Buying Stocks

If you are a beginner in investing, buying stocks can be overwhelming. It requires thorough research. Even after reading countless articles, watching numerous videos, and asking seasoned investors, the stock market can still be too complicated to fully understand. To help you make the right decision, below are some of the most important considerations.

 

1. Financial Ratios

Before investing in stocks, it is paramount to evaluate the company in which you will be putting your money. Understanding financial ratios will help you make more intelligent decisions.

Among others, one of the first things to look at is the price-to-earnings ratio. It is a comparison of the price of the stock and a company’s earnings per share. You must also look at the debt-to-equity ratio, which determines the debt levels of the company. It is an opportunity to assess the potential of going bankrupt. Another fundamental to consider is the price-to-book ratio. It is a comparison of the price of the stock and the company’s net value assets.

Especially if you are a novice, understanding ratios can be confusing. Good thing, that several companies can do a thorough job evaluating the fundamentals of different stocks. You might want to consider a stock picking service to help you make the right choice. It will lessen the work on your end.

 

2. Time Horizon

Not everyone has the luxury of time. Some people won’t mind waiting several years for their investments to yield returns. Others, however, cannot hold their stocks for a long time and might need to sell them sooner to be liquid

Before buying stocks, it is crucial to consider your time horizon. In a nutshell, it is the duration at which you expect to hold your investment before selling.

Stocks are liquid investments. It means that you can sell it at any time and get cash from it. Even so, you need to figure out the best time horizon, which can be any of the following:

  • Short-term: With this time horizon, most people are expecting a return within a year. If you only have this timeframe, then your best bet would be blue chip stocks with dividend payouts.
  • Mid-term: It is an investment that you can hold for one to ten years. You must know how to analyze emerging markets. It will allow your portfolio to grow while having a moderate risk.
  • Long-term: Most people who are new to the stock market will not choose this time horizon as it generally takes ten years. You might want to consider this if your goal is to save up for retirement or generate life-changing wealth.

 

3. Strategy

If you want to make money trading stocks, you should arm yourself with the right strategy. It is not as easy as choosing a sock and putting your money in it. It requires careful thought and a strategic approach to yield optimal returns.

Buy and hold is one of the most common strategies, especially for long-term investors. The exact duration of holding can vary from one person to another, but it should ideally be anywhere from three to five years.

Another popular strategy is income investing. It refers to choosing stocks with significant dividends. The dividends will allow you to generate income, and in turn, you can reinvest it to boost your earning potential.

Dollar-cost averaging is another strategy you might want to consider. Instead of regularly buying low and selling high, you might want to invest at regular intervals instead. It can lower the effect of volatility and average cost per share of a specific stock.

 

4. Volatility

Investors should assess the risks that come with their stock investments. Among others, one thing that can help gauge the risk is the potential volatility of the stock. No one can precisely guess how volatile the movements will be. Nonetheless, there are several ways to predict such, which can help you make better investment decisions.

Volatility refers to how quickly the prices are moving at a given time. High volatility equates to a higher risk. To understand how volatile stocks are, look at several elements, such as the political landscape, international economy, company performance, and industry factors.

While some people might see volatility as a negative thing, it can also translate into an opportunity. For some investors, it can be an entry point. If you are a new trader, however, it might be wise to avoid highly volatile stocks.

 

5. Company Performance

You can invest your money in tons of stocks, but not all of them will promise favorable yields. Thorough research is necessary to understand the current position of the company and where it will be in the future. This way, you can set realistic expectations on how your money will grow. Learn about the past, present, and future of the company.

Like financial ratios, you should consider different performance indicators as such will have an impact on the stock price. Some people might instantly shy away from small companies new in the market. Nonetheless, if you believe they have potential, such as a product or service that you think will sell or a competent board, then it might be worth your stock investment.

To better understand the company’s performance, look at its financial statements. It also helps to read up on their plans and research their market position relative to their competitors.

 

In Closing

 

Investing in stocks can be a promising way to grow your money. Nonetheless, it isn’t straightforward. Consider several factors that will help you make more intelligent decisions, such as financial ratios, time horizons, strategy, volatility, and company performance.

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