It may seem like the success of your investment strategy relies entirely on choosing the right stock. What amounts to the “right” stock can be very difficult to define. A company operating in a lucrative sector like tech or healthcare wouldn’t necessarily generate returns for investors if it’s badly managed. Then there may be profit-earning gems in slow-burn sectors no one really pays attention to.
Try to Choose Stocks that Disclose Financial Information
Stocks that are listed on markets exchanges like NYSE have to follow certain rules with regards to financial disclosures. The companies are required to follow reporting standards set by the SEC. Then there’s another class of stock that trades on OTC markets. These over-the-counter markets are not regulated and companies that sell stock here do not have to report finances, profits, or losses. Obviously, investors who choose low-cost OTC stock will be taking on a significant amount of risk as a result of lack of financial transparency, therefore, if you prefer to buy penny stocks for the low price, do be aware of the risk. It’s highly recommended to choose stocks that follow reporting standards. While there’s no prohibition against trading OTC stocks, investors should be aware of pump-and-dump scams in these exchanges.
Assess the Business’s Finances
Simply reporting to a stock exchange doesn’t indicate that a stock is performing well. Investors should independently verify a company’s financial health. There are several ways to do this. Start by reading the annual reports released by the business. Look for any news articles about the business to dig up old financial information. Some businesses offer information exclusively to investors that you can access upon request or on the official website. When performing this financial research, keep an eye on the revenue growth of the company. Has it been improving since the founding of the business? Do you see any problematic volatility issues? Revenue isn’t the only deciding factor. Evaluate revenue against the expenses of the company. The expenses should not be eating into the revenue.
Buy Stocks from Companies with Minimal Debt
Another important market of financial health of the business is debt. The presence of debt isn’t troubling per se, however, the debt should not be high compared to similar businesses in the same industry. Keep in mind that bondholders are entitled to debt payments over shareholders under the law, therefore, a company with high debt naturally has volatile share prices.
Buy Stocks from Companies with Legitimate Business Addresses
Want to avoid rampant scams in the stock market? The most basic step to take is to run a simple background check on the company where the securities originate from. Check the address, for example, and make sure it’s legitimate. Check the business registration number, especially if the company is located overseas. Make sure the emails and the phone numbers listed are registered under the company’s name. If a company fails any of these inspections, then you should certainly avoid the stock.
Look for Companies that Offer Dividends
Stocks that generate dividend payments belong to companies in good financial health. This means all the money isn’t going towards paying down debt. A dividend is a good sign that the stocks are really worth the investment, however, pay attention to how dividend payments have performed over the years. Has it increased, decreased, or remained the same? A decreasing dividend is not a positive sign for any business.
There’s no magic formula that shows which stocks are good and which are bad. The “magic” really is the investor’s ability to research and analyze a company and its financial health. Keeping this in mind, follow the above tips to pick the best stock for your portfolio.
Sources: bloomberg.com / sec.gov