Have you ever thought of buying stocks but you just couldn’t decide which one? Or, have you ever invested your money but it failed to yield as many returns as you expected? Many new investors find the whole process of investing in stocks scary and somewhat uncertain.
However, there are measures you can take before investing to reduce the risk level and increase the return on investment. Below are three important tips to consider when buying stocks:
Consider Price When Buying Stocks
Whether you’re buying real estate, commodities, bonds, stocks or mutual funds, price is the number one factor to consider in investment. It’s the determining factor as to whether your investment will be a losing or a winning bet.
Before any other factors are considered, it’s the price of a stock that determines its profit. When all other factors remain constant, you sell when the price is higher than when you purchased.
It doesn’t matter how big or good a company is, buying at the wrong time will get you into loses. Therefore, do your analysis and buy at the best price.
Intrinsic value is the true value of the company. The true value can be found by taking all the assets of the company and then subtracting its liabilities. When investing in stocks, you must look at this because the price is not always based on the value.
Mostly it’s related to the force of demand and supply. Getting the real value of the assets against liabilities is the most basic form of getting a company’s value. You can also go deeper and do advanced analysis.
For example, look at the company’s earnings per share and multiply it by its annual growth rate. This will give you a very clear picture of the profitability of the company.
You can further project the future cash flows and subtract the outstanding long term debts. For this level of analysis, you can talk to your broker or adviser. Investors who look at the intrinsic value get it more right.
The best figure to use to determine the buyout price of a company is the enterprise value. It is calculated by adding the market capitalization plus minority interest, debt and preferred shares and then subtracting cash and cash equivalents.
The enterprise value helps you evaluate a stock to determine whether a company is a candidate for takeover or buyout. This is because it takes into consideration the company’s debt obligations.
The market capitalization alone can give you a company’s value in a certain dimension but it doesn’t factor in the long-term debts. Therefore you may invest in a company that is seemingly doing well only for it to be acquired by another.
No amount of calculation makes you certain that investing in a certain stock is a sure thing. Especially with a secular bearish market. However, these three factors are good tools to determine which option is better and to stop you from getting into obvious losses.
Proper analysis is crucial before investing in stocks, especially when you’re putting in a good amount of money. Consider these tips before investing and you’ll reduce the risk of losing money that you would have otherwise saved.