Investing in stocks — Asking the right questions (full sample)
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Find out how you can use analysis as a starting point for finding worthwhile investments. This article explores the questions that investors should ask to see if a business is worth investing in.
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Investing in stocks — asking the right questions
Good investment decisions are made based on solid data, careful research, and keeping a cool head. When deciding what types of business you want to invest in, you need to be able to understand how their shares perform for investors, both individually and compared to other businesses and the market as a whole.
The easiest and most effective way to do this is to look at several different areas that relate to the business and the investment that you want to make. This fundamental analysis explores the data in the financial reports of every publicly listed company that trades on the stock markets.
Asking questions about business fundamentals
You can start your analysis by asking several questions about the business you want to invest in. Ultimately, you want to know if it is a good idea to invest in a specific business, compared to its competitors.
This type of analysis is only a tool and a broad one at that. It can give you insight into the workings, finances, and successes of a business, but there are far more factors outside a business's control that affect share price. That said, this will still give you a reasonable starting point. When you're looking at individual businesses and stocks, you'll want to ask the following questions:
Do you know the company's business and its area of operation? Some companies perform better in tight economic times, others are stronger when the economy is going well.
Can you identify strong companies in specific sectors? These will normally be household names like Disney in media, Procter & Gamble in consumer goods, Home Depot in home improvement, and Microsoft in computing.
Are company insiders buying or selling their own stock? People in the business buying and selling stock can be a useful indicator of the short- to medium-term prospects for the business. This isn't an exact science (they might be buying stock because it's cheap, or selling stock to finance something unrelated to the business) so use this alongside other information.
You shouldn't be investing money in a company that you don't understand. As an investor, you need to have an opinion of the future success of that business. It can also be very useful to look at the major competitors of a business and how they are doing; for example, if you were looking at Google, you might also investigate Yahoo or Microsoft as they have several competing products that do similar things.
You can also start your investigation with a sector or industry and find out who the largest companies are in that industry. Ultimately, you'll want to put your money into companies that are larger and stronger than their competition, unless you prefer underdog (value) investing or you think those other businesses are undervalued as a result.
This type of analysis is a good starting point for finding worthwhile investments. Combine it with your other investing strategies to create longer-term opportunities to create wealth.
Content originally written by Paul Maplesden, a freelance writer, and edited by me.