How To Know When To Invest In A Stock

Stocks or shares are a necessary part of an investment portfolio. When looking to invest and diversify, purchasing shares is critical. This is true whether you’re looking to have a high, medium, or low-risk portfolio. With all this talk about shares, many people ask, how do you know is a stock is worth it? There is an answer to this question. However, the answer may not be as simple as you thought.

There are many factors that go into deciding whether or not a stock is worth investing your time and money into. In this article, we will go through a few of the reasons as to what you should look for when investing in a stock. Furthermore, we will look at the textbook definition of a stock and why they’re useful.

By Definition, What Is A Stock?

A stock, as previously mentioned, is a crucial part of an investment portfolio. However, many people do not know exactly what a stock is. Therefore, it is important to help those who’re less knowledgable gain useful information. To put it simply, purchasing a stock means you’re acquiring ownership of a company. This may sound exciting. However, when you purchase a single stock, you’re only acquiring a portion of the ownership, a fraction if you will. With this ownership, you are entitled to the companies assets/profits. However, this is equal to the number of stocks you possess. If you were to own one stock of Apple, it would be equal to having a single drop of water within an ocean.

You may be wondering where these stocks come from and how they are bought or sold. First, let’s address where they come from. When a company wants to raise funds to run their business, oftentimes, they issue sell stocks. These stocks are then bought by future shareholders. From this, the company requires the money they need to run a business and the shareholder earns ownership in the corporation. However, as stated before, the amount the person owns is relative to the total number of shares. Therefore, if a company releases 10 shares and you purchase 2, you now own 20% of that companies assets and profits

The stock trade works similarly to how you may think. One person purchases a stock when the other is buying. However, there a couple of different types of stocks. There are common and preferred stocks.

Common stock is what most people purchase. Common stocks have a few key differences between preferred. First, people who own common stocks are able to vote at shareholder meetings. However, if you have preferred stock, this would not be possible. The trade-off here is that people who own preferred stocks receive dividends faster and take priority when a company goes bankrupt.

Lastly for this section, you may be wondering how you can earn money through stocks. The answer is very simple. You purchase a stock for a set amount, let it increase in value, and sell later. For example, you purchase 10 shares at $10 each. After a few weeks, the value increases to $11 each and you decide to sell. Once you sell you’ll receive $110. This means you’ve earned a profit of $10 for just owning a few stocks over a certain amount of time.

Why Are Stocks Useful?

Stocks are useful because they are a building block of wealth. They are an integral part of the economy and can let you know how a company is doing in a first glance. Certain patterns can indicate whether you should sell or buy. However, there are a few factors that need to be taken into consideration when purchasing a stock. As useful as they may be, there are always downsides.

Companies lose money and shareholders are forced to sell, that’s just how it is. However, the fact that the stock market opens an opportunity for you to earn immense amounts of wealth is amazing. Many people who go into trading stocks rarely regret it in the long run. Of course, you’ll make mistakes. However, using stocks to help achieve financial freedom is one of the most useful concepts that I could ever think of. Therefore, let’s take a look into what you should look out for when deciding to purchase a stock.

How To Know When to Invest In A Stock?

Investing in stocks can be quite jarring. There are so many options with tons of information. It can be quite hard to know exactly what you should be looking for. However, there are a few key points to look out for when potentially investing in a stock. Of course, the stock market can be unpredictable. Therefore, you can do your due diligence and still lose money. However, the purpose of your due diligence is to mitigate any risk that may come when investing in stocks.

Blue Chip

One factor that many people like to look at when investing is whether or not a stock is counted as a blue-chip. A blue-chip is a stock within a company that is able to financially succeed even during harsh times. You can find these types of stock in banks and telecommunication companies such as RBC or Bell. These are fairly safe stocks to look at and often pay dividends. However, since these companies have a national reputation and are well known, they tend to be a bit more expensive. For example, at the time of this article’s inception, RBC is currently trading at $92 per share.

Dividends

Some investors, such as Kevin O’Leary, mainly invest in stocks that pay out dividends. Why? It’s due to the fact that dividends are a form of income that you receive for being a shareholder. Many times people purchase stocks and sit on them for years with the hopes that they’ll increase in value. However, if you’ve invested in a company that pays dividends, you will receive a sum of many quarterly (or whatever the company decides) depending on how many stocks you possess. Essentially, dividends add more value and make your time owning a stock more “worth it”.

Low Debt

Before purchasing a company’s stock, you need to look into their history. However, one thing to look at is how much debt a company has. If a company has a colossal amount of debt, that could be a clear indication that they are not profitable or have bad management. When investing in a company, they need to have a clear vision without a mountain of debt. Of course, there are many times where a company has had more debt than profit, especially at the beginning. However, if a company is consistently in the red with an increasing debt ratio, it might be time to look at other prospects.

Volatility

When a stock is volatile, it can be either good or bad. Volatility can earn you a lot of money in a short amount of time. However, you can lose that same amount of money just as fast. Many long term investors stay away from companies and industries that show increased volatility. Investing is supposed to be a marathon. A long journey with mistakes and successes. Therefore, if you’re looking to build your wealth, find companies and industries that are stable.

P/E Ratio

One of the biggest factors that people look at when investing is the P/E or price to earnings ratio. This number is gathered by dividing the current price of a stock to the earnings per share. The higher the number, the better indicator that there will be significant growth in the future. However, many websites calculate the p/e ratio for you. Furthermore, it is important to note that this is not the sole indicator as to whether or not a company will do well. There have been many times where a company has a high p/e ration and never sees monumental success.

As you can see, companies like Air Canada that have a lower trading stock have a higher p/e ratio, of 91. However, global giants that trade at a higher value such as Apple and Google have lower p/e ratios of 28 and 30 respectively.

Trends

The last section we will talk about is trends. Even though trends don’t solely define a company, it is extremely important to look at it. If a company has a trend where its value dips semi-annually, stay away. If the company has a trend of poor management, allocation of profits, and cash flow, stay away. Essentially, stay away from companies that show negative trends. Although these trends may not define the company as a whole, it may take you on an emotional roller coaster that you may not want to be on.

Shameed Chris Khan

Shameed is just a man on a mission to help those around him gain financial success. Obsessed with writing about all things finance, this GTA native is constantly learning and sharing his experiences with others.