» Stock Trading Strategies and Systems » Before You Buy Stocks

Before You Buy Stocks

No stock investment should be done without a thorough preliminary check on its potentials. This is required in order not to wake up in the next morning and wonder why you have put your money in this stock at all.

This is especially true when the question comes to long-term investing. It will never hurt you to make a close examination of the stocks you are about to purchase. If you don't do that your potential of losing money is highly increased.

In order to determine whether a certain company's stock is worth the investment you should consider the following criteria:

  1. Company growth potential

    What you should pay attention to is the growth in earnings and revenue. Additionally, the company growth should be sustained over longer periods of time.

    In case the revenue lags behind with respect to earnings, you should dig deeper and try to find the reasons why this is so.

    On the other hand, if the earnings are declining or keeping one and the same level while the revenue is increasing, it may mean that:

    • The company is launching a new product
    • The company is entering a new market
    • There are management inefficiencies
    • The company cannot compete efficiently in the current market
  2. Company understanding

    You should be well aware of the activities and purposes of the company and be possible to state them in simple words so that even a child can understand you.

    You are not required to know the subtleties of the particular business, but you should educate yourself on its operations and functions. Additionally, don't direct your attention to companies with sophisticated business models. They don't guarantee you higher profits. The latter can be gained even from companies with less sophisticated business models that provide almost the same efficiency.

  3. Cost of investment

    Now that you have done the necessary research on the company and have gained a thorough understanding of its structure and operations, it is time to see how much the deal will cost you.

    Before paying for the stock, check whether the stock is not currently at its "hot" state, which may mean paying a high price.

    A good tactic may be to wait until the market suffers the negative consequences of some bad event and its prices are down. In such a way you gain the opportunity of enjoying higher profits later.

    If the price of the stock is too low, but you cannot see anything wrong with the company don't hesitate and buy it.

    On the other hand, you should always assume the chance that your analysis has some flaws. In such a case, it is better to abandon the research for the sake of saving your money and not risking losing them just because you have been impatient.

Final Piece of Advice

Apply as much patience as possible and observe the stock for a while. Make all the necessary checks and analysis before jumping into the deal. If the conditions have changed it may be better to abandon your research and stock and head for the next opportunity by learning from the mistakes you have committed.

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