If you are looking to invest in the stock market and are not a seasoned investor, then this article is for you. Here, we explain the seven main rules that you need to follow while choosing stocks to invest in. Knowing these rules will help you in your investing process. The seven thumb rules that are going to be mentioned here are merely guideposts for you to understand how to begin your investment.
Investing in two or more stocks is preferable
In order to protect your investment, it would be best to invest in more than two stocks. While doing this, it is important to not invest in stocks that have a similar profile. For best results, it would be great if you could invest in a number of different stocks each with a different risk profile. Considering this, the optimal investment option will be to have a stock portfolio in which you have some low-risk, low-yield stocks and some high-risk, high-yield stocks. It may not be possible to get a low-risk, high-yield stock. The search for one could prove elusive. Instead of that, you can hedge your bets of obtaining better results by investing in the pattern described.
Knowing business models
If you want to invest in a company, you should first understand how it works and how it makes money. For this, you need to know and understand the business model that the company follows. This is because it is important to know if the company is following a path that will make money or not. The company’s success is directly linked to the returns that you will obtain from your stock investment. In the event that you need help understanding a company’s business model, it would be wise to seek the help of experts. Expert help can be invaluable in such cases.
Reading and understanding annual reports and other performance reports
All companies release performance reports every quarter. In addition to those, companies also release annual reports. The idea behind the release and publication of such reports is to let the investors and other interested parties know how that particular company is doing. Competitor analysis is not part of these reports. It is important to study these reports carefully since they provide an insight into how the company is doing. A financial report will contain a lot of numbers starting with revenue and net profit. The current value of these numbers compared with the values in the previous years or quarters will show if the numbers have increased or not. Depending on that you can know if the company’s performance has improved over time. Of course, it could be possible that the industry had a shake-up and that not all companies made much profit or revenue. But if is a frequent occurrence that does not always match with industry-wide slumps, it is an indicator that the company is in trouble. Another thing to remember is that past performance is not always indicative of future performance.
Knowing the leadership team heading a company
If you want to know if a company is being steered in the right direction, especially considering the current scenario of constantly shifting targets and consumer interest, knowing the company is in good hands might put you at ease. In order to know this, you need to know the team leading the company. The more proven experience that the company’s leadership has, the more likely it is that the company will be taking steps to avoid common pitfalls that companies in that particular industry may face. This will ensure that the company does perform well and this in turn will serve as an indicator that your investment is safe. Therefore, it is important to know the people leading the company you want to invest in.
Seeing the company’s unique selling point
In today’s hypercompetitive world, there are a number of companies that provide similar services. There are a number of apps that provide services that overlap with each other. In order to navigate in such a space, it is important for a company to differentiate itself. This way, it will have something that people will tend to prefer or gravitate to. Therefore, it is important to understand the unique selling point of the company that you wish to invest in.
Knowing the company’s debt-to-equity ratio
If you want to invest in a company, it would be a good idea to know the debt the company has. If a company has more debt, your investment will carry a higher risk. So choose a company that has a lower debt-to-equity ratio. That is, the debt that the company is carrying with respect to the total number of shareholders the company has should be less than the debt-to-equity ratio that is the industry average for that particular industry. Investing in such a company will lower your risk.
Knowing that panicking or making emotional decisions will not help
The most important thing to know while investing in stocks is that emotional decisions will not help. Panicking is another reason people tend to lose money in the stock market. Each decision that you take, whether to purchase or sell shares of a particular company, should be rooted in solid analytical decision-making processes. This way, you can avoid common pitfalls and behavioral biases that can cause investment losses.To learn more on stock investment you can read here.
In addition to knowing these things, it is also important to not seek advice from everyone you know in order to invest. Restrict your queries to a small group of people who can be relied on to give you advice based on your financial situation instead of their personal experience and preferences. Or, seek out media that will give you facts and then base your decisions around those facts. This way, you can avoid being influenced in a particular way. If you can do all this, you will be on track to making intelligent investments that can give you a good return later.