Four Things You Should Examine About a Company Before Investing Into a Stock

Mar 22, 2021 | 2021 Articles, Community

by staff

Individuals usually save money to make large purchases, for emergencies, retirement, and to invest in stocks and other investment products. Today, many amateur and experienced investors are using their savings to make investments, hoping to receive a considerable return on their invested capital. Some of the most volatile stocks can help them add diversity and balance to their portfolio but are perilous because of price fluctuations, often up and down.

moneyWhile all investment products have its risk, volatile stocks can have long-term risks and result in enormous losses. A volatile stock is a penny stock and extremely cheap on exchanges and through brokerages. What makes the stock a significant risk is its fluctuation in share price, the reason advanced investors may purchase and hold over time. You can purchase penny stocks at a price of $5 or less per share in higher volumes, but must know its risks if held for long-term, 10 plus years. A short-term volatile stock is much safer with low risk and can help an investor recoup losses on other stocks and securities.

Tips for First-Time Investors

• Include time in your daily schedule to educate yourself about the different investment securities and products available on stock exchanges and the over-the-counter (OTC) markets.
• You must create a budget and commit to saving for investing in your future. You will need to plan and open different savings accounts for emergencies, short-term personal use, and investments.
• Examine the financial position of the company before you invest. This information will reveal the value of the entire organization and used as a strategy to determine whether a stock is a good buy.

Before you invest, plan first like you would when time is approaching for you to buy a new car and have to save for the down payment. Set aside time in your schedule to thoroughly educate yourself about the risks involved in investments on reliable sites, such as SEC. Wealth planning requires creating a budget you must commit to in saving and monitoring spending and income. When you purchase a new car, it is an investment and becomes a part of your assets, as invested capital and a house. Anytime you invest in a product, whether it is a stock, mutual fund, or another asset, perform due diligence to ensure you are making the best decision.

4 Things to Look for Before You Invest Your Money in a Stock

1. Volatility of a Company Stock
If the value of a company stock often changes in its value with ups and downs in price, investors may opt to sell or hold their shares. When you decide to invest, there are a variety of investment options and products great for a diverse portfolio, including the following:

• Stocks
• Mutual Funds (Stock and Bond)
• Bonds (Corporate and Municipal)
• Funds (Lifecycle, Exchanged Traded, and Money Market)
• US Treasury Securities

Stocks are the most volatile investment products on the market. They have the greatest risk and the potential for the highest return on investments. You should avoid volatile stocks if this is your first investment and learn as much as you can before investing your savings.

2. Value of a Company Stock
The next thing you must do before buying a stock is to determine the value of the entire company. You want to know the market cap and the cost of acquiring the company. To calculate the value, take the price of all the company’s outstanding shares of common stock and multiply it by the price per share.

3. Relative Cost of a Stock Using the PE Ratio

The price-to-earnings ratio is a valuable tool to measure the relative cost of company stock. To calculate the ratio, divide the price per share by the per-share earning. The results will inform you if the stock is overvalued or undervalued which usually changes quarterly.

4. Verify the Registration of a Company on Stock Exchanges
Security Exchanges Commission (SEC) has various tools for investors to investigate the registration status of a public trading company. You can find a company’s SEC filing in Edgar’s database and examine financial statements, such as the income and balance sheet.

Beginner investors have to educate themselves about investments before they invest in volatile stocks and other investment products. Education and training will help you select the securities that meet your needs. As with purchasing a used car, you must examine the product before investing your hard-earned savings.

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