A beginner's guide to picking the right stock
Investing in stocks can seem overwhelming when you don’t know how to begin. The chances of losing your money make you anxious but you also don’t want to leave your money sitting idly in your bank account.
We understand where you are at right now which is why we’ve put together a list of the important things you need to consider before purchasing any stock.
Figure out your investment goals
With investments, the ultimate goal is to make (or not lose) money but our specific goals may vary. You may be investing so your money doesn’t lose value due to inflation, to make large returns or to get passive income.
If you’re looking for income, then your best bet is to invest in companies that issue out dividends & have good dividend yields.
If you’re looking to build wealth, then you probably have a higher risk appetite & can invest in promising startups.
If you’re looking to preserve your money, then you probably have a lower risk appetite and may be interested in more stable companies that already make steady profits.
Whether you have one or more of these goals, the most important thing is to identify them and diversify your portfolio accordingly.
Know the company
Before you invest in any company, you should have answers to basic questions like what service the company provides, the product they sell, their industry, the countries they operate in and how they make money.
You can also check out the industry’s Exchange-Traded Fund (ETF) page and compare the performance of the company with other companies in that industry.
Price to earnings ratio (P/E ratio)
This is a company’s share price in relation to its earnings per share. It tells you the share price investors are willing to pay per $1 of earnings. For example, if a company’s P/E ratio is 5, it means investors are willing to pay $5 per $1 of earnings.
A low or high P/E ratio can tell you whether a company is undervalued or overvalued. However, this isn’t always the case so ensure you do your proper research on the company itself before making your decision and also compare the company’s P/E ratio with other companies in its industry.
Another good way to know if a company is worth investing in is to look at its dividend. A dividend is a share of a company’s profit that it pays to its shareholders. Not every company pays out dividends but if you’re looking to make occasional passive income, investing in one that does would be a good idea. Large companies who make steady profits typically pay the best dividends while companies who are in their early stages may be unable to issue dividends for a while.
If the company you’re interested in pays dividends, you should observe its dividend yield over the past few years. A sudden increase may not always be a good sign, especially when you can’t point to any obvious positive reason from your research in step two.
Earnings before interest, tax and depreciation & amortization (EBITDA)
Before you invest in a company, you might want to know how much they make before interest, tax, depreciation & amortization are deducted. EBITDA shows that the company's earnings are enough to cater for interest on debt and for shareholders too. It's a more transparent way of determining a company's value.
Debt to equity ratio
This means a company's total debt relative to its market value. The D/E ratio can be a good indicator of a company's financial performance. The standard figure varies for some industries so you should compare the D/E ratio of the company with other companies in its industry to make sure it’s not above the industry average.
While these may not be easy to read by beginners, you can simply observe the movement of the chart. A chart that rises from the left to the top right typically indicates that the company has good performance because it shows the company’s share prices have increased over time. However, a chart that decreases to the bottom right may indicate rocky performance.
You should know though, that the stocks market is volatile which means that it is normal for a company to lose value and regain it. So when observing the price charts, take a look at the prices over the years & consider its long-term performance.
Now that you’re done researching the companies you want, you’ve probably streamlined your options or added some more. The next step is to start investing. Visit your Buycoins account to get started with as little as ₦500.
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