What are 7 important questions to ask before you buy a stocks?

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Short Answer

Undertaking fundamental analysis and proper research is essential before investing in any particular stock. Apart from this, you should also consider asking seven key questions like 'What does the company do', 'How is it placed among its peers', 'How is the management of the company', etc before investing in it.

Detailed Answer

Basics of Stock Investing

Stock investing provides not only the foundation of getting wealthy in the future but also a way to beat inflation and grow your corpus in the long run. Stock investing seems easy but if not done with proper research, it can take away a lot of your money.

New investors have been drawn towards the stock market lately. These individuals undertake high-risk endeavors like intraday trading and derivatives trades. But eventually, end up losing and hurting their long-term wealth creation process.

Stock picking is yet another simple yet skillful task. Investing in the right stocks can help you generate wealth but picking poor quality stocks can end up costing you both money and time.

To eliminate such painful losses early in your investment journey, you can refer to these seven important questions before investing in stocks

7 Important Questions to Ask before Buying a Stock.

Stock picking is basically an art and not a formula-based method. By applying simple logic and finding out the answer to some basic questions, you can easily beat professionally fund managers. In order to pull this off, you just need to find out the right answer to some questions. Some of them are:

1. What does the Company do?

This is the very basic question that you should ask when considering investing in any company. Warren Buffet, one of the renowned investors himself believes to invest in only those companies which he personally understands. The same applies to every investor out there. If you have an IT background, you can analyze IT companies better than maybe FMCG companies. In the same way, if you have knowledge about the banking sectors then look to invest in that specific sector.

There must be certain companies which you have heard of from your friends and family and you are tempted to purchase them. Wait and ask yourself, do you really know what it does. If the answer is ‘No Idea’, you should probably skip it or first learn about it and then think of laying down your money.

2. How does the Company stand among its peers?

It is always good to pick a company with a competitive advantage over its peers. It is also good to ensure how the company is performing when compared to similar companies in the sector. This will give you a comprehensive idea about the company’s standing and also its market share.

By selecting a strong competitor, you will be certain about the company's market hold and anticipated growth.

3. How are the financials of the Company?

The financials or the balance sheet of a company are equally important as the wheels of a car. Hence, it is important to find out all the necessary financial ratios such as the Net debt, Net profits, Profits after taxes, Dividend payouts, etc.

You should always check whether the company is making profits or losses. It is common for any company to incur losses at the initial states but if the company reports a series of losses without any concrete reason. That should be a red flag for the company.

4. What is the future outlook of the Company?

When taking a long-term approach, the future prospects of any company is essential. This is because the future prospects of the company should be aligned with the current market trend. It is also important that the company’s products are versatile enough the be altered according to any future changes in the particular industry.

The management and analyst's outlook about the company matter as they have access to some key metrics to judge a growth of a company and use it to figure out the upcoming outlook of the company.

5. Is the management of the Company good?

The management of a company has a lot to play in the success of any particular entity. The promoters and the board members are some of the key members who take all the majority discussions that steer the company. You must evaluate the past performance of the management and the future forecasts.

It is also important to look at whether the top management has skin in the game. This means, do they own a substantial stake in the company or not?

6. What are the threats associated with the Company?

You should always know of the weaknesses and threats of the company as well as the industry. That will present you with a better picture of the short as well as the long-term outlook of the company.

For example, any particular sector that has a lot of entry barriers would be beneficial for a company. Similarly, a highly regulated sector could experience multiple threats from the government as well as from other players.

7. What is the valuation of the Company?

After you have done your due diligence and figured out a good and suitable company for investment, the final step is to buy it at the right price. You can obtain the intrinsic value of the company through the discounted cash-flow model or other methods such as Price to Earnings (PE), etc.

Finding out the valuation is essential before putting your money in. If you put all of your money at an extremely lofty valuation, your overall return percentage goes down. Hence, it is wise to wait for some time before rushing to put all money at once.

Questions to Ask Before Buying Stocks

These were seven of the most relevant questions which you should ask and find out the answers to before investing in any stock.

You should also be cautious that a company that is doing good at the present need not perform the same down the line. Because of this reason, it is important to keep a track of the companies and make sure they are equally good as they were a couple of years ago.

With these, you will figure out the exact position of the company and also the future how the company will grow and function in the future. By following these methods, you will be protected from any impulse investing decisions and will also protect you from investing in fundamentally poor stocks. Once you have the answers to all these 7 questions and are satisfied with the result, you can go ahead and put your hard-earned money into the company.

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