Choose Companies And Not Stocks

Before choosing a stock to invest in the stock market, you are presented with a myriad of options and make your decision based on a number of premises or assumptions.

Many times when customers purchase certain products, they do so based on the reputation of the brand in terms of delivering quality. Before people buy, they consider a brand they can bank on, without suffering any casualty or losing anything.

Investment works in the same way. Before choosing a stock to invest in the stock market, you are presented with a myriad of options and make your decision based on a number of premises or assumptions.

While it is not uncommon or wrong to choose stocks based on their stock prices, a safer and more effective option is to choose stocks based on companies’ fundamentals.

In essence, before identifying an appealing stock and investing in it, there are certain values an investor must observe in a company. This is what is often regarded as fundamental analysis.

Fundamental analysis involves considering and narrowing a number of factors like values of a company, the strength of its management and competition, etc. in order to determine whether it is the right security for you to invest in.

Here are some of the things you should consider.

Income Generation and Earnings Growth

When picking a company, you need to consider the rate at which they generate income. Do they generate enough amount of profit as a business organization? You also need to check if their profits and earnings are not placid, but actually grows as time passes. Make sure that they have a regular system of dividend allocation which could definitely increase over time.

Stability and Durability

There are moments in the market industry where companies are met with challenges, especially when stocks lose value. To some extent, these moments may be healthy, because it forces many organizations to be creative and tactical.

However, you should be on the lookout for companies that have reoccurring challenges even in times when there are no general upset in the market industry. Companies prone to lose stability, failing to stand the test of time are not the kind you'd want to invest in.

Debt-to-Equity Ratio

All companies have liabilities. This is because they fund businesses using both debt and equity. However, you have to be cautious when investing with companies that carry more debts than necessary or more than they can handle.

If a company’s debt to equity ratio is heavy on the debt side without corresponding fundamentals to back it up, it might be a red flag to watch out for.

Tactical Strength Of Management

When there's no competent sailor at the helm of a ship, it could get shipwrecked. In business before investing, you should check how competent the leaders of an organization are.

How well do they tackle challenges? Are they innovative? You don't want to put your business under the care of people who do not have your interests at heart.

Written by Lawretta Egba.