Think you have what it takes to start investing in company shares? Here are six essentials you need to know before considering it…
Buying stock in a company might seem like an easy task; you look at which companies are doing well, you buy some stock in them, you make money. Unfortunately, it’s not that easy and there are a lot of considerations you need to make before you can even start investing.
To start investing, you need to be completely comfortable with the ins and outs of the stock market. You’ll need to know what all the different terms mean, and be comfortable with buying and selling shares back to a business to be truly successful in this endeavour.
In this post, we’re going to share six essential considerations to make before buying shares in a company so you can make the best investments possible. Take a look…
What Do You Need to Know Before You Start Buying Shares in a Company?:
Actually investing your money in a company isn’t that difficult; all you need to do is buy shares in it. The difficult part is picking the right shares and knowing how to make the right decisions to make money off them.
With that in mind, what do you actually need to consider before you start buying shares in a company?
1. Decide On A Time Horizon:
The first thing you need to do is pick a time horizon. The time horizon you choose will help you decide which stocks to buy and which ones to leave. You can either choose a short-, medium-, or long-term horizon based on your financial goals:
- Short Term: any investment you’re planning to own for a year or less. The shares typically invested in for this time horizon are stable blue-chips that pay dividends from companies with a good balance sheet to minimise risk.
- Medium Term: any investment that you intend to hold for one year to 10 years, and tends to be in quality emerging markets with shares that have a moderate level of risk.
- Long Term: any investment you plan to keep for more than 10 years. and can be a bit riskier as the shares have time to recover and could potentially generate a high return on investment.
2. Devise An Investment Strategy:
Once you know what your time horizon is likely to be, you can start to devise an investment strategy. Three of the most successful types of investment strategy are:
- Value Investing: where you invest in companies with undervalued shares compared to others in their industry that have the potential to generate gains.
- Income Investing: where you look for quality shares that pay significant dividends that you can reinvest in other shares.
- Growth Investing: where you invest in already growing companies in the belief that they will continue to grow and make money over time.
There’s no reason you can’t get involved in all of these strategies at some point in your new life as an investor. However, for now, it’s a good idea to pick one and master it before spreading yourself too thin.
3. Learn The Fundamentals:
Now that you have an idea of how long you want to hold your stocks for and the types of strategies you can choose from, it’s time to have a quick look over the fundamentals of investing in companies. Here are the most important ones:
- Price-to-Earnings (P/E) Ratio: measures the share price against the company’s earnings per share (EPS) so you can predict the potential profits.
- Debt to Equity Ratio: measures how much the company is in debt so you can see how close they might be to bankruptcy.
- Price-to-Book-Value (P/B) Ratio: measures the shares price to the net value of assets owned by the company and divided by the number of outstanding shares. This metric is used to gauge whether a stock is valued properly.
There are more metrics you can learn to help you understand shares, but they will have to be a topic for another time. For now, as long as you have your head around what these three metrics mean, you’ll be making better investment decisions in no time.
4. Choose A Company To Buy Shares In:
Once you have your strategy in place and you know what metrics to keep track of, you need to decide what sort of company you’re going to buy shares in. Ask yourself:
- Is the company the right fit for your portfolio?
- Does it match with your investment strategy?
- Will it make you money within your chosen time horizon?
Asking yourself these questions every time you look for a company to invest in will really help you avoid investing in companies on a whim because their profits appear to be going up or because you’ve read about them in the news.
5. Do Some Further Research Into The Business:
Once you’ve gone through a quick screening of the companies that could fit your portfolio, you need to vet them further to see whether they’re worth your investment. Consider the following:
- Stock analysis: look through the financials of the company, check over their past performance and predict their future performance using the P/E ratio.
- News: knowing what the company is involved in can help you understand their potential for failure. Have they been in a lot of scandals in the past, have they been bought out by another company, who do they work with that could potentially affect their stock price?
- Industry research: is this company’s current industry booming? Who are their competitors? Are there other companies within their industry more suited to your portfolio?
Doing this level of deep research is a big part of what makes your investment a failure or a success.
6. Decide How Many Shares You Want:
You’re finally on the home stretch. You have a strategy, you know how long you want to hold your stocks for, you’ve thoroughly researched the company you want to invest in and you’re ready to buy shares. So, how many are you going to buy?
It all depends on how much money you have to spend and how much you believe in the company. Don’t spend too much at first because this is your first investment. Instead, put some money in and see how it goes whilst you learn the ropes.
Ready To Start Buying Shares?:
In this post, we’ve shared six essentials you need to consider before you invest your money in a company.
Obviously, the more you know the better, but there is a lot to learn about buying shares. So, if you’re looking to start soon, these basics should be enough to get you going.
Please be advised that this article is for general informational purposes only, and should not be used as a substitute for advice from a trained financial professional. Be sure to consult a financial professional if you’re seeking advice about investing. We are not liable for risks or issues associated with using or acting upon the information on this site.
This post complies with my Disclosure Policy.
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