You worked hard to become debt free. Then, you saved your 3-6 months’ worth of expenses for emergencies. You are in control of your spending and have mastered living under your means. The logical next step is to begin building wealth.
Investing in stocks, bonds, mutual funds or any other type of investment is one of the best ways to do that. There are certain questions to ask before buying stocks in a company, or any other investment.
When you are ready to start your wealth building journey, you will want to consider different forms of investments. There are certain ways to invest without much knowledge, just read Easy Ways to Start Investing for some ideas.
While you can invest with little knowledge, it’s always good to know what you’re getting into. Before buying shares of a company (which is what stock is), do your due diligence ahead of time. Check out a few questions to ask yourself before buying stocks and truly diving into investing.
Why do you want to purchase stock in this particular company?
There’s nothing wrong with wanting to invest to make a return. However, investing in companies that have the same values as you can make it easier to stay invested long term. When you own stock in a company, you own a portion of that company. Wouldn’t you want to own a company that operates in line with your beliefs?
Another thing to keep in mind is that building true wealth comes from long-term investing. You certainly can make money in short-term investments, but it requires a different level of research and patience. If you’re in this for the long haul, get clear on why you want to buy stocks from any particular company.
What does the company truly do?
Once you’ve decided that you want to purchase stock in a company that aligns with your values, or you see long-term rewards, it’s time to get specific on what that particular company does. How does that company make money?
It’s not hard to research publicly traded companies, so you will want to look for information around their business model. If you can’t pinpoint exactly how they can or will make money, how do you know if it truly is a sound investment?
What do the company’s financials look like?
A company’s financial performance is critical in driving up or down the price of their stock. The most important financial figures to know are the company’s revenue and earnings. Revenue is the amount of money the company brings in, where earnings are the true profit after all expenses and liabilities are covered.
The higher a company’s revenue and earnings, the better. However, you will want to look at past performance as well. Is the company earning more over time? If so, that’s a great sign. If the company is losing money over time, it may be a sign that something isn’t working within.
Lastly, you always want to compare these numbers to other companies in the same industry. How does this company perform against the average? Being on the lower end of the average doesn’t mean the company can’t be a pioneer in the industry, but at least you will know what you’re getting into and what to look for in terms of how the company plans to keep up.
Does this company pay a dividend?
Many companies choose to distribute a portion of their earnings to anyone holding stock in their company each quarter. These quarterly payments are called dividends, and they can be a great source of passive income for many investors.
I do want to stress that the more stock you have in a company, the better the dividends will be, but any extra money is welcomed! If you continue to invest in a company long-term, you will notice your dividend payments get higher and higher. If you invest in funds through Betterment, or any other brokerage, you may notice they reinvest dividends on your behalf.
Some companies offer other benefits to their shareholders – the option to exercise sale of stock at a certain price being one. When deciding if investing in a particular company is the right way to go for, you definitely want to familiarize yourself on how the company takes care of their shareholders.
What is the company’s market capitalization?
Market capitalization is just a fancy term for size. Basically, it’s the value of all the company’s outstanding shares multiplied by the share price. So, a company with 10 million shares that sell for $100 each would have a “market cap” of $1 billion.
Just some food for thought – large-cap companies generally have market caps of $10 billion or more. Like the name implies, mid-cap companies have market capitalizations of $2 billion to $10 billion and continuing the trend, small-cap companies have market caps of $300,000 to $2 billion.
In previous articles, I’ve mentioned that “diversified” portfolio of investments is the best way to go to ensure your investments are as safe as they can be. A diversified portfolio should have a good mix of larger companies with small and medium-sized companies as well.
Larger companies tend to have more stable stocks, which are good for longer-term investing. Small companies, especially in the tech industry, can have higher returns in the short-term but may be less stable. Understanding a company’s size will help you get a good idea of a stock’s growth potential.
Related: 5 Basic Things to Know About Stocks
Investing in the stock market may seem scary, but the more you familiarize yourself with terms and knowledge, the more comfortable you will be come. Investing is a must if you want to build true wealth over time, so don’t let fear of the unknown stop you from reaching your true financial potential!
Have you started investing in stocks or funds? What were your first experiences with investing? Any tips or feedback you can share with readers? Post a comment below to share!