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What to Look for When Buying a Stock

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    What to Look for When Buying a Stock

    Almost all investors interested in the stock market must be wondering what they should look for when buying a stock. This is because no one wants to lose money here making any mistakes. A detailed study of the market is very useful in picking the right or quality stocks. Though there are experts to give suggestions, you have to take the final decision on your own and hence, gaining maximum knowledge of stock investments is always useful. Here are the vital things to consider before you actually put your hard-earned money into stocks.

    Company Management and Performance
    The company's management and performance are actually inter-related. Most of the time, it has been observed that stable and good management helps companies achieve their financial goals quite convincingly. So, before you invest in any company's stock, you should study the past performance and track record of the management. If you are convinced that the management is dedicated to the interest of the shareholders, only then you should put in your money.

    The dividend paying history is one of the aspects to look for when buying a stock. Dividends are paid to shareholders by the company from the net profits after having made provisions for depreciation and depositing money in reserves. Dividends are given on a per share basis which means that more the number of shares you own, more will be the total dividend payout you will get. Generally, top firms with billions in profits give handsome dividends, and hence you should look for such stocks to get something more than just stock price appreciation.

    Price to Earnings Ratio
    Price to earnings ratio is the ratio of the current market price of the stock to its profit. If the current market price is less as compared to the earnings as compared to other listed peers, then the market cap of the company will be low and it can be a great investment bet.

    Earnings per Share Ratio
    This is the ratio of the total net profit generated in a quarter/financial year to the number of outstanding shares of the company. More the earnings generated on every equity share, better will be the performance of the company's stock.

    Gross Profit Ratio
    Gross profit ratio is an important valuation ratio which needs to be considered for stock analysis. This is the ratio of the total gross profit to the total sales generated by the company. More the gross profit as compared to other firms, more will be the ability of the stock to perform.

    Net Profit Ratio
    Net profit ratio is widely used for knowing the profitability of a firm. It is the ratio of the net profit to the total sales generated in a particular period. More the net profit percentage, better is the company for long-term investment purpose.

    Debt to Equity Ratio
    Almost all businesses need loans to finance their projects. However, if the debt levels are very high, then the firm loses a lot of money every quarter in the form of interest payments. So, it is essential to know the debt to equity ratio of a firm. This is the ratio of the total outstanding debt to the shareholders equity. You should prefer companies with a low debt to equity ratio.

    Effective Use of Cash
    There are some companies which have huge cash reserves but are not able to use them properly to increase shareholder returns. As an investor, you should stay away from such companies as the chances of stock appreciation are low in such cases.

    Institutional and Retail Interest
    Before you become a shareholder of a company, you should know if big investors, retail investors as well as institutional investors are interested in the particular stock, a stock can go up substantially only if it is bought on a large-scale and hence, checking these statistics are necessary.

    Expansion Policies
    The chances of stock price appreciation are high in case of companies which are rapidly expanding. So, look out for companies that are opting for mergers and acquisitions for ensuring fast growth in the future.

    So, by now, you must have clearly understood what to look for when buying a stock. When buying stocks for the first time, you should also consider your risk taking ability and investment time horizon to get good returns in desired time duration.

    Quran 2:32. "Glory be to ALLAH, we have no knowledge except what You have taught us. Verily, it is You, the All-Knower, the All-Wise."



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    The Stock Market is Always Right - Price and Value Are not the Same Thing


    When the stock market is showing its volatility, whether predominately up or down, it is easy to offer reasons the market is wrong.
    A number of pundits and predictors make a decent living telling investors why the market is too high or too low.

    They proffer that the market is overbought or oversold for this obvious reason or that less obvious reason.

    The impression is these sages can set the market straight and get it on the right track.

    They Are Wrong

    There’s only one problem: These folks are always wrong.
    They may have significant data to support their position, including reams of historical charts and comparisons.

    Here’s the problem with these pontifications restated: The market is always right.

    No matter what you or anyone else thinks is should be, the market doesn’t really care. The market prices assets every minute of every day the markets are open and it is never wrong.

    Here’s why: The price of anything, whether stocks, bonds or bananas is what a willing seller and a willing buyer agree on - no more and no less.

    Price and Value

    It is important to not confuse value and price. A stock may be valued much higher or lower than the price it sells for.
    However, that doesn’t necessarily change the price.

    Value is a subjective term, while price is absolute.

    This doesn’t mean investors should abandon their determinations of value, in fact, just the opposite.

    It’s a safe bet that value investors are among the most successful over the long term (think Warren Buffett).

    Value investors attempt to identify stocks that are being priced below the company’s value. We often say the market is incorrectly pricing these assets, but that is wrong.

    Correct Way

    The more correct way to describe the activities of value investors is they attempt to find assets trading below the true value of the company.
    Their strategy is to buy and hold the asset until market pricing rises to reflect the true value.

    This does not mean the market was wrong in pricing the stock lower than what the investor believes is the true value.

    It simply means that at that moment and given all the other factors that drive stock prices, this is what a willing seller and willing buyer agreed upon.

    As we all know in volatile markets, that price may change second to second.

    Investors are not particularly concerned with these fluctuations other than finding a window to jump in and buy.

    Influence Price

    There are many factors that influence stock prices. As crazy as it seems at times, the market is always right in finding that price where buyer and seller meet.
    Indeed, this is the primary function of any market: bringing buyers and sellers together. What price they agree upon is of no concern to the market.

    Don’t confuse price and value. Traders (people who frequently buy and sell assets are only concerned with price.

    However, investors with a long-term perspective are more interested in the value of the asset and if they can buy it at a discount.
    Quran 2:32. "Glory be to ALLAH, we have no knowledge except what You have taught us. Verily, it is You, the All-Knower, the All-Wise."

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