What To Consider When Investing In Stocks?
Investment shouldn’t be as scary as some people make it out to be. In essence, all you’re doing when you invest is declaring faith in the future of a company; you’re saying that you believe the asset you’re buying now is going to be worth more in the future because it will appreciate in value.
As such, building an investment portfolio shouldn’t be out of the reach of the average person; you don’t need to be a stock market expert to invest. With that said, there are still some things you should think about if you want to go down this road. Here are some of the things you should consider when you invest in stocks.
Your knowledge of investment
While it’s true that anyone can get involved in investing, that doesn’t mean you can – or should – do so without building up your knowledge of the investment world first. Sites like InterInvestor can help by serving as repositories of information; they will help you track the markets and see what’s strong and what’s weak, as well as teach you all about the basics of investment.
However, there really is no way to go into an investment knowing everything you possibly can, so one of the best ways to amass knowledge is simply to start investing.
One of the most important aspects of any company when it comes to buying stocks is the trend you might see in earnings growth. This means paying attention to whether a company’s earnings are steadily increasing over a period of time. If they are, that’s great – it means the company is in a strong position and is likely to keep getting stronger. If, however, you notice a downward earnings trend, or you notice that earnings tend to wildly fluctuate, that implies that the company isn’t a sound investment and that you should look elsewhere.
Leadership is one of the most important factors in a company, especially when it comes to investment. Put simply, how much faith do you have in the people at the very top of the company in which you’re choosing to invest?
Some companies have very strong personalities that can sometimes make the company feel like a less sound investment than it is, while others have rock-solid leadership in place that can guide the company to long-term success. Look for as much information about leadership as you can before you make an investment decision.
You should be looking closely at any potential investment’s dividends strategy. If you see that the company is reliably and consistently paying dividends to its shareholders, that’s a good sign; it shows that there’s a lot of confidence in that company’s ability to pay and keep paying.
However, if you see a dividend payment spike, that might be something to worry about. Companies often engage in paying huge amounts of dividends when they’re worried that bad news is on the way and they want to keep investors on board. Look for spikes and stay clear of them.
It’s important not to get bogged down in the smaller details. If a company has one or two downturns when it comes to its bottom line, that’s normal; most companies will go through problems sooner or later. However, you should be looking for general upward trends when you zoom out and look at the big picture.
This goes the other way, too. If a company has a huge spike, that doesn’t necessarily mean it’s a sound investment. Some companies or investments will spike simply because of current events; even a single tweet can determine the fate of investments sometimes.
Whether or not a company has debt is not indicative of its overall ability to pay dividends. Most companies have debt; some aren’t even profitable despite their massive popularity, so these aren’t reliable metrics for judging the safety of an investment. However, a company’s debt-to-equity ratio is something you should be keeping your eye on.
In essence, this refers to the total liabilities of a company (i.e. debt) when compared to the equity of its shareholders. The higher the leverage ratio, the more risky an investment is (which admittedly doesn’t always make it a bad investment).
How fast can you turn your investment back into cash? That’s what we mean when we refer to the liquidity of an investment option. There may, for example, be costs associated with liquidity that might mean you can’t turn your investment back into cash quickly, or you may find that there’s a lock-in period that prevents you from immediately cashing out.
This might not be an issue for you; perhaps you’re locking in for the long-term and want to stay with a company as an investor. However, if you are looking for a safer option in terms of cashing out, you should keep an eye on liquidity.
What To Consider When Investing In Stocks: Portfolio diversity
Are all of your stocks in a single industry? If so, it’s time to diversify your portfolio. You see, if you invest in one industry, then you’re massively increasing the risk that your entire stock portfolio could crash; if that industry fails or goes through something that causes all of its stocks to depreciate, you’ll suffer.
It’s a good idea to try and keep your fingers in as many pies as possible when it comes to investment. Spread your stocks and shares across different industries and different companies within those industries so that you’re never in danger of folding because of a few setbacks.