If you have any experience with investing, you know that it is a surefire way to create wealth. Plus, a lot of investors go for stocks when developing their portfolios. You need to remember, though, that it is not that easy to pick the right stocks. With the number of stocks in the thousands, there are five things to research before you lay your money down for a stock.
1. Know and Understand the Company’s Business
Before you even think about putting money into a company’s stock, you need to know the business basics. Besides knowing what their main business does, you need to be aware of everything else that could affect their stock prices, such as community involvement, customer base, and product or service quality.
Once you completely understand the fundamentals, you will determine whether the business will be around for the long haul to provide a nice return. When a product or service is used by many continuously, it will likely continue.
2. Evaluate Price-to-Earnings Ratios
When you evaluate the price-to-earnings, you decide if the company is the better option compared to other companies in the same industry. Essentially, the price-to-earnings are what investors use when determining how much they feel comfortable paying for every dollar made yearly. For example, if Netflix has a ratio equaling five, it conveys an investor willing to pay only $5 for every $1 the company earns. Simply put, the Netflix stock (P) price is divided by the Netflix earnings (E).
3. Judge Risk Based on the Beta
Take a peek at the beta of the stock. This will show the volatility of the stock compared to the S&P. When you notice that a company’s performance differs as compared to the S&P, then it means the beta will be higher.
What it all boils down to is whether the stock’s beta is higher than 1 or not. If it is, then the stock is riskier. A beta below 1 will represent stocks that are considered to have a low risk. The beta for each stock can be found among other stock details, such as dividends and yield on the various stock monitors such as those offered by TD Ameritrade.
4. Ensure the Dividend is High for the Stock
When deciding on the stock to put money into, you need to be aware of the dividend that the stock pays. With the dividend, it provides a way to earn more and appreciate its price.
When the dividend is high, you can expect a strong amount of income generated by the stock.
Besides that, it’s a good idea to remain cautious of overly-high yields. The reason why is because they usually point to a company that is in financial trouble, so they attempt to entice investors to buy their stock with the promise of a high dividend yield.
It is better to stick to a stock that offers a maximum of 8% in yield. This will have the stock as less of a risk while providing investors with a more obtainable dividend rate.
You can also search for stocks that continuously raise their dividends yearly, even if a recession or crash occurs in the markets. Although the yield from the dividend is not high compared to other stocks, you can believe that the company will remain strong well into the future. Plus, these stocks will be less likely to cut their dividends.
5. Become Familiar With Charts Associated With Stocks
It is important to become familiar with all charts that are associated with stocks. They can assist in showing a stock’s historical growth and how it performed. They can also provide a stock’s performance that is seen as being short-term.
When you have a stock chart, you can determine the good performing stocks and those which may provide a substantial break in the future. Although there is no correct way to implement a chart when the timing is concerned, you will have a sense of how a stock’s performance may be in the future.