10 questions you should ask yourself before buying a stock

Highlights

• It is important to go through the past results of a stock in addition to current quarterly or annual reports of the company.
• One should in advance, before any buy, detail all facts and findings about the stock, including any factors that could directly or indirectly affect the stock performance in the future.
• If the company has a good future soundly planned, then its stocks prices are expected to increase, making it a potentially profitable buy.

With the rapid advancement in the global stock market, investment in stocks has now become one of the best ways to earn income or returns.

The latest technologies and smartphone devices have enabled investors worldwide to bet their money on stocks with just a few clicks via trading platforms and applications, thus replacing the intermediate stock brokers.

However, some investors still prefer brokers to buy/ sell stocks and manage trades on their behalf for which they are charged brokerage fees.

Whatever the case be, proliferation in stock trading methods has raised awareness among investors and traders about the stock market dynamics.

We often see first-timers losing heavily because they bet on a low-priced stock without enough information about the stock, and about prevailing and foreseeable market conditions.

The stock market is highly volatile and there are various economic and non-economic factors at play that can even shatter the whole market scenario. Even if you are an experienced trader, some news on Reddit, Twitter or any such network could turn the profit upside down.

That’s why in order to end with a desirable profit in your hand, it is imperative to analyze your every move while dealing in stocks, which starts with buying one.

Also read: How should beginners buy stocks?

Here are few questions that you ask yourself and think about before buying a stock

1.       How much do you want to invest?

Before making any buy, you must decide on the quantity of your investment. If you are newbie, to the stock market world, then the investment amount should be part of surplus money or savings after deducting monthly expenses. It is always advisable/ good to avoid any kind of financial malfunction in case things go south.

2.       Where do you want to invest?

Where you want to park your moolah is your choice. There are many different sectors of companies listed on exchanges, such as technology, automotive, real estate, mining, retail, blockchain, FMCGs, etc.

Investors should consider market indices to get an idea about the sector/ industry performance, which helps in capitalizing maximum gains from foreseeable market opportunities.

3.       Are you in it for the long term?

Many financial enthusiasts purchase a stock and hold it for a longer duration until the stock climbs to the expected prices to earn higher gains. While some traders buy a stock for shorter time periods, for a week or months, and even for a day.

If you know how the stock market functions and understand the factors that affect stock prices, then you are good to go with any approach. However, if you are a rookie, it is safer to be away from the complexities of intraday options and other trading strategies to fill your pockets as these demand accurate price predictions in an expirable timeline.

Also read: Five under-the-radar investment strategies to reap stock market gains

4.       What do you know about the stock/ company?

Invest after acquiring some basic understanding about the company, its organizational structure and culture, geographies, divisions, product offerings, management, dividend policy, etc. to evaluate its market standing. The fundamental analysis of the company may tell you whether the stock is worth buying or not and whether you should switch to other well-performing stocks backed by strong foundations.

Also read: How to become financially independent through investing

5.       How has the stock performed in the past?

Measuring past performance in terms of revenue, profits, dividend pay-outs, achievements, stock prices movements via charts and graphs, etc. are also crucial aspects that define the quality of the stock and help in making buy decisions.

6.       How is it performing now?

The latest revenue and earnings, cash flows, profits, and other operational details from quarterly/ or annual reports, employee policies, market performances, etc. reveal the current market position and well-being of the company. Thus, both the past and current results should be integrated to get a clearer picture about the company before engaging with its stock.

Also read: Can investments in IPO help you earn big?

7.       Do you know the future roadmap of the company?

The future prospects of the company is a key factor at play with regards to the course of its stock. If the company is planning to expand its businesses, or launch innovative products, get government aid then that could play favorably (announcements are available on press releases and other reports etc). Such stocks are likely to size up in the future, making it a profitable investment.

8.       Are you willing to take risks?

To ensure that you don’t end up with empty pockets, it is recommended that you assess and evaluate the risk attached with the stock you are going to buy. If your conscience does not let you take a higher risk, then you can always stick to stocks with relatively low risk.

Also read: Low-risk or high-risk investment? Which one should you go for?

9.       Have you run a peer comparison?

A peer comparison will help you judge the market position of the stock relative to similar stocks that exist in the particular sector. There are certain trendsetter stocks that set the pace of other similar stocks in the market. Hence, it becomes significant to track the performance of such stocks to buy at a right time.

10.   What is the overall market trend and how is it going to affect the stock?

Sometimes even when you have researched well about the stock, still any kind of negative news could directly or indirectly impact the stock market situation and the stock’s position. Thus, you should know in advance about all the micro and macroeconomic factors that can possibly affect the stock’s performance and select the stock as per your market understanding and risk appetite.

Also Read: Planning to invest? Keep track of these economic indicators

Bottom line

In order to make the right buy, it is essential that you know all the strong and weak aspects of the stock that you want to buy, so that you can predict its response to the prevailing market conditions in a timely manner, and accordingly remediate your plans.