Stocks. What comes into your mind when you hear that word? For some, it has been their path to financial independence; others, not so. Have you been planning to get into stocks? You have to prepare yourself before investing in stocks. Here is a checklist.
Do a deep dive into the target company. Learn everything you can about it. Here are some of the ways you can do so:
- Company website
- Investor briefing
- Simplified reports
- News reports
A company website has a wealth of information. You’ll find profiles of the Board of Directors and key management staff as well. As you read through their profiles, you’ll note many things.
Some of them are their length of service with the firm and their career trajectory. You’ll also learn about their educational and professional background.
Ensure you have checked the company’s financial reports. These guide you into its past and present financial performance.
You get a clear picture of its past, present, and future trajectory.
Remember to know what’s the company’s core business. Then, find out its business model and market share in comparison to other market players.
Take a look at the company’s investor briefing. It’ll guide you on the company’s overview. Also, investor briefings often share details on financial performance and organizational structure.
Check recent media reports on the company. Did the firm get into the spotlight in a good or bad light? Are there any allegations of impropriety? Or has it recently won a multi-billion dollar contract? These are some of the queries recent media reports should help you answer.
Sometimes, the annual reports can be too much. A website such as Morningstar.com can ease your pain by simplifying these reports. You’ll find the key financial ratios and statements here in a simplified manner. Morningstar-like websites are designed to be as easy to use as possible. You’ll find crucial data on a company here.
Beta is the risk profile of a stock as a proportion of an index fund or another stock compared to the market’s risk potential.
To get a good picture of a stock’s performance, you measure it against the Standard and Poor 500 index(S&P 500).
If your stock has a beta of 1, it means that it corresponds with the market movements. If the market happens to move up, your stock will move up as well. There are some stocks with a better lower than one. It means they’re not very much affected by what moves the market.
There’s also the third category of zero betas. Such stock has no relation with the market. It can move up when the market is going down or remain stable.
Look at the firm’s beta over a period, say five years, to make a fair assessment. A firm with a higher beta may have a faster growth rate but also high risks. So, a low beta firm provides you with low returns but offers stability in return.
Beta example. Company X has a β of 1.5. It means the firm’s performance was 150 % of what the S&P made.
Listed firms distribute dividends to shareholders as a way of sharing shareholder’s wealth. Each firm, depending on its circumstances, has its dividend policy. Here are the common ones.
1. Progressive dividend policy
2. Stable dividend policy
3. Residual dividend policy
4. Constant dividend policy
5. Zero dividend policy
Progressive dividend policy
Under this policy, dividends will rise if the earnings per share (EPS) increases. In case the EPS goes down, the dividends won’t reduce.
Stable dividend policy
In this policy, even if the market isn’t performing well, you’ll get your dividends. There are three ways of ensuring a sound dividend policy.
The first approach is having a fixed cash dividend paid per share. The second way is through having a fixed percentage of the company’s income paid as a dividend.
The last approach involves a mixture of the first two approaches.
Residual dividend policy
Under this approach, a firm pays its dividends after deducting its working capital and capital expenditures. It means shareholders may miss dividends in some years. Many investors hold a stock for the long term in such firms.
Zero dividend policy
Many startups in their growth phase have such a policy. Such firms reinvest their earnings into their operations in their early years. Most of these funds go into research and development as well as marketing. After a while, they may start paying dividends when they are stable.
There is a select group of firms known as dividend aristocrats. These are firms that have been paying increased dividends for a quarter of a century. An example is Exxon. If you want an increased dividend payouts year to year, this is your best choice.
Stock charts enable you to track the stock’s performance. There are four main types of charts:
- Candlestick chart
- Line chart
- Bar chart
- Point and figure chart
These stock charts are challenging to read, but you need to understand the basics. With time, you can dive in deeper and become an expert stock chart analyst. Then, you’ll be able to make better stock market decisions.
When reading a stock chart, check whether the chart’s trajectory. If the chart ends higher than it began, you are okay. But, if it ends lower than it began, you should worry about your stock’s performance.
Looking through different financial ratios comes in handy. Here are some of those you ought to check out:
Debt to Equity Ratio
This shows the company’s debt relative to the equity held by shareholders.
Price to Earnings Ratio
It shows the company’s stock price relative to earnings per share.
Price to Book Ratio
It shows the firm’s market valuation relative to its book valuation.
Earnings per Share
It’s the company’s income attributed to a single share.
Dividend per Share
It’s the amount a firm pays out from its earnings as a dividend. It’s often lower than the earnings per share.
As you prepare to make your stock buys, make an informed decision. As Warren Buffet once said, ‘Risk comes from not knowing what you are doing.’