What to Know Before Investing in a Company
You’ve decided to add some individual stocks to your personal investment portfolio. How will you make the difficult decision of deciding which stocks to purchase? Warren Buffet has said he doesn’t invest in any company that he doesn’t know something about. That approach can help you as you choose investment options.
Read the financial news. There is so much information available today on stocks and other investments that there is absolutely no reason to make an uninformed investment decision. It’s easy to search for financial news about any company you may be considering to see what commentators are saying about that company and whether there have been any controversies or rumors of company takeovers.
Check the company earnings. It’s pretty easy to find a history of the company’s earnings over time. Has there been steady growth, for the most part? If not, does the company’s online history offer any explanation? You definitely want an earnings record that moves steadily upward. Focusing on a company’s earnings can also reveal if the company has wild turns of profitability followed by losses, according to experts.
Price/earnings ratio. One of the most popular ways to assess the price of a stock is to determine the PE ratio, known as the price/earnings ratio. Experts say that is one of the best ways to determine if a stock’s price is a bargain or should instead be avoided. The information to make this determination is available from a variety of different sources online. Take the current price of the stock and divide it by the average earnings per stock share for the past year for the company. For example, a company with a stock price of $15 per share that has earned $1 for every outstanding share in the past year has a PE ratio of 15. That is a level that generally indicates a healthy stock price, according to analysts. When the ratio is lower, experts say that often is a sign to stay away from the stock because a drop in price may be in the near future.
Look for dividends. Many experts believe that choosing stocks that pay dividends to investors is a simpler way to avoid risk when trying to determine if a stock is a bargain or not. Often, larger companies like General Electric and Kraft Foods pay dividends – sometimes as often as once a quarter and sometimes on a yearly basis. It’s possible to assess a stock’s divided by comparing the price of the stock to the dividend paid out yearly per share. A stock at $50 per share that pays $2 a year per share in dividends has a yield of 4 percent, which would be a pretty good deal compared to interest rates available in other basic accounts, according to experts.