Alter our break to write in winning the lotto, we are back to our investment series.

 

This week…Questions you must ask before purchasing stock.

 

Are you buying the stock, because your brother told you? Or you got a tip from the barman? Or are you just buying the stock because you like the company’s products?

Believe it or not, a very large percent of people who invest in the stock market are investing their hard earned money based on the above advice without any further research.

Does this sound like a smart way to invest to you? It certainly doesn’t.

Now if you ask your brother what stock to buy and your brother happens to be Richard Branson, well then I think it’s safe to say you will make a good investment, but how many of us can claim Richard Branson as our brother?

For the vast majority of us this kind of investing is very risky, while you could make money, it is more probable that you will lose money.

To help you keep from losing your money and to help you make the best choice when picking stocks, below you will find the five most important questions to ask yourself before buying a stock.

What Does the Company Do?:  This sounds like pretty basic information, but it can be tough to find. Most companies offer more than one product; a big conglomerate might offer hundreds of different products in a range of industries. Digging into the company’s lineup can give you a better sense of the forces that will drive its results.

Scrutinizing a company’s product line can also tell you where its profits come from. For example: video games accounted for 11% of Sony’s total sales in 2000 but 40% of its earnings.

The annual report is the best source for this kind of information. Be sure to read the shareholders letter, as well as the presentations of the company’s product lines. Those are also part of the company’s SEC filings.

How Fast is the Company Growing?:  Over long periods of time, stock prices are driven by earnings growth. That can come when a company cuts costs, but ultimately, revenues have to increase if earnings are to keep going up.

If revenues are increasing, that’s a good indication that something is working. Maybe the company boasts a better-than-average product or a more effective sales force. In contrast, flagging sales can signal trouble.

Earnings growth signifies that the company is making more than enough to offset its costs. Established companies should show consistent results, but young companies often display strong revenue growth with little or no earnings. Witness the myriad of Internet companies with lots of sales and no profits.

 

“A business that makes nothing but money is a poor business.” – Henry Ford