Before you invest your hard-earned money in stock market trading, you must do your due diligence and research the company you wish to invest in. Analysing the fundamentals of the company will not only help you find value in your acquisitions but also help you avoid major losses.
However, this process of researching whether a stock option deserves a place in your investment portfolio can be quite daunting, especially for novice investors. To help make it a tad bit easier, here’s a list of things you should look for when researching a public company for stock investment:
Stable Earning Growth Trends
You can start by assessing the company’s financials which can be accessed on its official website or through your brokerage firm. If the historical earnings and revenue records of the company show positive quarterly and annual growth, investing in it may be a prudent choice.
Company Debt Profile vis-a-vis the Industry Standards
Simply put, higher debts will mean lower profits. The debt-to-equity ratio is an important financial metric that determines the profitability of a company. This number is equal to the company’s total liabilities divided by its shareholder equity. Generally, companies with debt-to-equity ratios lower than 1.0 may be prudent investment choices. However, it is judicious to contextualise this value as per the industry in question and the growth stage of the company.
Company Valuation
Price-to-earnings ratio is simply indicative of the share price of a company to the earnings per share. Comparing this ratio with the peers of the company in the same industry can give you an overarching idea about the real value of the stock. If the company has a low price-to-earnings ratio, you will have to find out if the stock is being undervalued by the market, in which case it might make for a prudent investment option.
Good Dividend History
A dividend-paying company can offer you a sense of security in uncertain economic times. Dividend-paying companies may be well-suited for investors who wish to park their money in the share market today and continue earning a regular income from their investments. Steadily growing dividend payments are a sign of stability. However, ideally, this too should be contextualised as per the prevailing economic climate and the other key financials of the firm.
Durable Competitive Advantage
Reviewing the business model of the company, its R&D efforts, product innovation strategies, etc. will give you some idea about the competitive advantage it has in the industry. A durable competitive advantage is necessary to make your investment count when online trading.
Growth-Oriented Management
While reviewing the hard-core financials of the company will give you an idea about its performance and profitability, understanding the effectiveness of its leadership will shed light on how it stands to perform in the future. Looking at the leadership tenure and expertise, along with its inclination for growth and innovation will give you insights into how the company might fare in the future, after all, long-term stability can only be driven and executed by agile and ingenious management teams.
Conclusion
While investing in the stock market today may help you capitalise on profits tomorrow, you surely need a fool-proof research strategy before venturing into unknown waters. Thus, when online trading, nothing beats comprehensive and exhaustive research strategies.
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