To succeed at investing, you can’t just pick a stock at random and hope for the best. Savvy investors research the market and every single stock they invest their hard-earned money into. Research and analysis is the backbone to every investment strategy.
Here are four essential things to know before you dive in and invest in a stock.
1. What the Company Does
Billionaire investor Warren Buffet advises people never to invest in a business they don’t understand. That’s a motto that most successful investors follow because it’s difficult to make moves if you don’t understand how the business works.
Jim Cramer also advises investors to only purchase stock from businesses they have exhaustive knowledge of. What does the company make? What types of services do they offer? Where do they operate, and what is their flagship product?
Thankfully, it’s easy to find this information by performing a quick search online or visiting the company’s website to learn more about what they do.
2. Price/Earnings Ratio
Price/earnings ratio, or P/E, may seem a bit confusing to new investors, but it’s an important piece of data to pay attention to.
A stock’s P/E is calculated by comparing the current market price to the company’s cumulative earnings over the last four quarters.
Whenever you’re considering investing in a stock, compare the P/E ratio to other companies in the industry. If the P/E is higher, look for reasons why. If the P/E is lower, but the company is growing fast, then you may want to watch the stock.
3. Chart Analysis
It’s easy to get bogged down by details and technical jargon when looking at charts, but ultimately, what you’re looking for is positive growth.
If the chart starts at the lower left and ends at the top right, that’s an investment worth considering, according to Dennis Gartman, famed investor. If the chart is headed on a steep decline, stay far, far away.
Beta sounds more complicated than it really is. Essentially, it measures the volatility of a stock over the last five years.
If a company outperforms the S&P 500 over a five-year period, it has a higher beta. Stocks with a rating higher than 1 are considered high beta, or higher risk. Anything with a rating lower than 1 is considered low beta, or lower risk.
High beta stocks are attractive, but much riskier. They have the potential to earn you a lot of money, but they also have the potential to lose you a lot of money, too.
A lower beta means that the stock isn’t as reactive to movements on the S&P 500. While you won’t make quick money with low beta stocks, these are considered defensive stocks and are better suited for long-term investment.
Some investors also look for dividend stocks, especially if they don’t have the time to invest in intensive research. Dividend stocks provide you with a steady stream of income, and you get paid no matter the stock price. High quality stocks often have dividends of 6% or higher.