Signs of a Bad Stock
Knowing when to invest is a great skill all intending investors should learn. Sometimes going the extra mile to know when there is a distress signal protects you from falling into the trap of impending doom.
Investing in stocks is mainly about research, understanding the company you are interested in investing, as well as the process of following trends to know when to successfully buy, hold or sell.
It is important to know the distress or warning signs of a company in order to differentiate a good stock from a bad one. Remember those companies that were worth hundreds of millions of naira back in the days, and no longer exist? Their collapse came as a surprise to many including shareholders.
Successful investors recognize the warning signs that show that a certain stock is probably a bad investment at a given time. Below are a few of the signs to put you on red alert.
A company’s cash flow is its lifeline and investors who monitor this can largely protect themselves from future doom.
When there is no fresh inflow of capital from lenders or shareholders and the company’s cash payments exceeds its cash receipts over a sustained period, it’s a sign that the company’s funds in the bank are getting extremely low. Insolvency looms. Stay clear of such companies.
Secondly, sudden unexplained layoffs of employees without a publicly communicated reason or plan for future business growth can lead to market panic resulting in poor stock performance. This may sometimes signify that the company is not doing well and must be approached with caution. Also, sudden resignation of key executives and directors should demand closer attention from intending investors.
Seasoned investors watch out for unusual share price declines. A surge or sudden decline in price might signal trouble ahead for a company and may also signal a valuable opportunity to buy an-out-of-favour stock. Before deciding whether to buy such stock, be sure to examine and research on all the company’s fundamentals to ensure you are making the right decision.
Probes and investigations by the Securities and Exchange Commission (SEC) normally precede a company's collapse. This is because those companies would have been found guilty of breaking accounting rules. It is always a good idea to pay closer attention to companies summoned by SEC. Nothing sends investors running faster than the sight of regulatory problems. That is why you must do proper research and before placing stakes on such companies.
A business is usually between the company and its consumers. Companies that fail to engage online and respond to ongoing customer complaints do not fare well. Such stocks suffer a fatal end. The market often reacts to public opinion, and issues with its service or resolution ability can drive down the value of such stock.
Knowing when to invest is a great skill all intending investors should learn. Sometimes going the extra mile to know when there is a distress signal protects you from falling into the trap of impending doom. Do your research, take your time, and you will know when to avoid investments that lure you into the deep blue sea.