Five essential things you should know about every stock you buy

6 March 2017 11:05 am - 0     - {{hitsCtrl.values.hits}}

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Investing is easy but investing successfully is tough. 
Statistics show that the majority of retail investors, who aren't investment professionals are faced is lower profits. There could be a variety of reasons, but there is one that every investor with a career outside of the investment market understands: they don't have time to research a large amount of stocks and they don't have a research team to help with that monumental task. 
For that reason, investments made after little research often result in losses. That's the bad news. The good news is that, although the ideal way to purchase a stock is after a large amount of research, an investor can cut down on the amount of research by looking at these select items:


What they do 
Warren Buffet advises investors to never purchase a stock unless they have an exhaustive knowledge of how they make money. What do they manufacture? What kind of service do they offer? What is their flagship product and how is it selling? Are they known as the leader in their field?.This information is very easy to find. Using the search engine of your choice, go to their company website and read about them. 


Price/Earnings ratio
Imagine for a moment you were in the market for somebody who could help you with your investments. You interview two people. 
One person has a long history of making people a lot of money. Your friends have seen a big return from this person and you can't find any reason why you shouldn't hand this guy your investment. He tells you that for every Rupee he makes for you, he's going to keep 40 cents leaving you with 60 cents.
The other guy is just getting started in the business. He has very little experience and, although he seems promising, he doesn't have much of a track record of success. The advantage to this guy is that he's cheaper. He only wants to keep 20 cents for every Rupee he makes you - but what if he doesn't make you as many dollars as the first guy?If you understand this example, you understand the P/E or Price Earnings Ratio. If you notice that a company has a P/E of 20, this means that investors are willing to pay Rs20 for every Rs1 per earnings. That might seem expensive but not if the company is growing fast. 
The P/E can be found by comparing the current market price to the cumulative earnings of the last 4 quarters. Compare this number to other companies similar to the one you're researching. If your company has a higher P/E than other similar companies, there had better be a reason. If it has a lower P/E but is growing fast, that's an investment worth watching. 


Beta
Beta seems like something difficult to understand, but it's not. Beta measures volatility or how moody your company's stock has acted in the past. Think of the price index as the pillar of mental stability. 
If your company drops or rises in value more than the index it has a higher beta. With beta, anything higher than 1 is high beta (meaning higher risk) and anything lower than 1 is low beta (lower risk). 
You have to watch high beta stocks closely because, although they have the potential to make you a lot of money, they also have the potential to take your money. A lower beta means that a stock doesn't react to the index movements as much as others. This is known as a defensive stock because your money is much safer. You won't make as much in a short amount of time, but you also don't have to watch it every day. Beta says something about price risk, but how much does it say about fundamental risk factors?


 Beta :Re-assessing risk
The well-worn definition of risk is the possibility of suffering a loss. Of course, when investors consider risk, they are thinking about the chance that the stock they buy will decrease in value. 
The trouble is that beta, as a proxy for risk, doesn't distinguish between upside and downside price movements. For most investors, downside movements are risk while upside ones mean opportunity. Beta doesn't help investors tell the difference. For most investors, that doesn't make much sense.
There is an interesting quote from Warren Buffett in regards to the academic community and its attitude towards value investing: "Well, it may be all right in practice, but it will never work in theory." Value investors scorn the idea of beta because it implies that a stock that has fallen sharply in value is more risky than it was before it fell. A value investor would argue that a company represents a lower-risk investment after it falls in value – investors can get the same stock at a lower price despite the rise in the stock's beta following its decline. Beta says nothing about the price paid for the stock in relation to its future cash flows.
If you are a fundamental investor, consider some practical recommendations offered by Benjamin Graham and his modern adherents. Try to spot well-run companies with a "margin of safety" – that is, an ability to withstand unpleasant surprises. Some elements of safety come from the balance sheet, like having a low ratio of debt-to-total capital. Some come from consistency of growth, in earnings or dividends. An important one comes from not overpaying. Stocks trading at low multiples of their earnings are safer than stocks at high multiples.
Ultimately, it's important for investors to make the distinction between short-term risk – where beta and price volatility are useful – and longer-term, fundamental risk, where big-picture risk factors are more telling. High betas may mean price volatility over the near term, but they don't always rule out long-term opportunities.


Dividend
If you don't have time watch the market every day and you want your stocks to make money without that kind of attention, look for dividends. 
Dividends are like interest in a savings account. You get paid regardless of the stock price. Dividends of 6 percent or more are not unheard of in high quality stocks. Before purchasing a stock, look for the dividend rate and if you simply want to park money in the market, invest in stocks with a high dividend. 


The chart
Learning to read a chart is a skill that takes time, but basic chart reading takes very little skill. As famed investor Dennis Gartman says, if an investment's chart starts at the lower left and ends at the upper right, that's a good thing. If the chart is heading down, stay away and don't try to figure out why. 
There are thousands of stocks to choose from without picking one that is losing money. 
If you really believe in this stock, put it on your watch list and come back to it at a later time. There are many people who believe in investing in stocks that have scary looking charts, but they have research time and resources that you probably don't.


The bottom line
Nothing takes the place of exhaustive research. However, one key way to protect your assets is to invest for the longer term by taking advantage of dividends and finding stocks with a proven record of success. Unless you have the time, risky and aggressive trading strategies should be avoided or minimized. 

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