Questions You Need to Ask Before Buying Stocks

Investing your money in stocks can be overwhelming. Here are a few questions you need to ask before investing your hard-earned money into a company’s shares.

What is the company’s business model?

This is the first question you should address. Knowing what the company does and how it makes revenue is necessary for you to analyze whether your investment in its shares will be worth it.

To find out this information, you would have to do some amount of research. It is possible that some companies may prove to be extremely complex, while some may be too guarded about giving out information. It is advisable to avoid buying such companies’ stocks.

How is the company’s financial performance?

One of the key features of the company which you should check up on, is its financial performance. What is the company’s revenue (how much money it brings in) and profit (earnings)? Evaluate these figures by comparing them to the previous quarter and the same quarter one year before. Compare the company’s performance to its competitors as well.

While scrutinizing the earnings, check both total earnings and earnings per share (EPS) based on the industry the company falls under. Knowing the company’s financial health can help you determine if you should invest in its shares.

What is the company’s market capitalization?

Market capitalization is the size of the company. It is the company’s outstanding shares multiplied by the share price. The market capitalization of large-cap companies is generally the highest, and their stocks are more stable. Although small-cap companies’ stocks provide greater returns in the short-term, they are more volatile. A good stock portfolio should have a combination of large, medium, and small companies.

Does the company operate domestically and internationally?

Researching the geographical source of a company’s revenues is also essential before you invest in its shares. Knowing whether a company has overseas operations can help understand if there is scope for growth. 

A company with some exposure to international markets makes for a good investment. Moreover, if you invest in a U.S.-based company that operates overseas in a big way, you can avoid investing in international companies with which you may not be well-versed.

Apart from these, also check other factors like if the company pays dividends, the company’s historical performance, and its price-to-earnings ratio, among other aspects.

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