Article | 3:09 min read

What to Look for in a New Stock Purchase


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As an investor, it's important to have diversity in your portfolio. Putting all your investments into one stock is a risky move because if it doesn't pan out like you expected, you could wind up losing a lot of money. However, diversifying your portfolio means you have a better chance for success.

Investing in the stocks shouldn't be done carelessly. It's important that, when using the stock market to grow your portfolio, you research before you invest.

According to The Street, many investors don't weigh the pros and cons of a stock and instead invest based on what is in the news [1].

"There are some investors who simply don't carefully weigh their stock-investment decisions," Brad Barber, a professor at the University of California Davis, said. "Individuals are heavy buyers of stocks that are in the news -- that is true of good and bad news."

For those entering the stock market for the first time, there are several things they should check out before they decide to buy.

A good business plan
MarketWatch suggested people only invest in businesses in an industry they know about [2]. You'll likely have better insight in a company if you know what they are doing than a business in an industry you are clueless about.

Beyond knowing how a company works, it's important you understand their business plan. Benzinga stated in a Forbes article that it's important that a company has a straight-forward plan that you can easily understand [3]. If you don't know how the company will make money, it means that you don't know how you, as an investor, will either.

Follow success
The Street advised investors' second question is whether or not the company is successful. If a company isn't making money, then its investors aren't either. The best way to find out how well a company is doing is to look to quarterly and annual reports, which are made available for all public companies. You can also check into the section of a company's website dedicated to investor relations or look at reports filed with the U.S. Securities and Exchange Commission.

MarketWatch warned not to only look at the most recent reports, but to also dig into a company's financial history. Just because a company is doing well at the present moment doesn't mean it has a good track record, and this is what you want to base your decision on. There are four main categories you'll want to evaluate before buying a stock:

  • Standing debt
  • Bottom line
  • Revenue growth
  • Dividends

If the company has been a strong asset to investors over its lifespan, it could be one worth investing in. But if it has a history of debt, shrinking finances and reduced dividends, it's probably a good idea to stay away. You can only judge a company on its past, and if its past isn't great, its future may not be, either.

Don't take shortcuts
According to MarketWatch, there are several signs a company might display that, on the surface, look like a good investment. But it's important to dig past these to make sure there aren't any red flags. For instance, just as it's a good idea to read reviews before buying a product, it's important to read analysts' reports before buying stocks. However, be aware that some analysts could be swayed in one direction or another, resulting in bad information. Look at multiple reports over time to see what various analysts had to say about a company.

Expanding your portfolio is a great way to build financial strength, but only if you do it correctly. Make sure you do as much research as possible before you buy a stock to make sure your investment is sound.

[1]. 10 Questions to Ask Before You Buy a Stock
[2]. How to Choose a Stock
[3]. Six Rules to Follow When Picking Stocks


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