If you’re just getting started in investing, picking stocks requires doing some homework beforehand. Here are five tips for newbie investors.
Just because a company is doing well now, you want to be sure it’s not just a hiccup. Meaning, market conditions or recent investments could have created a temporary boon. Look at a graph of the company’s earnings over time. If it’s more up than down, it’s a sign the company tends to do things right consistently and has financial stability. On the other hand, if it’s more down than up, any current upward spike could be temporary.
Dividends are a distribution of cash or stock, representing a share of profits divided among shareholders regularly, typically quarterly. However, not all companies pay dividends. Many retain earnings to be reinvested into the company. A company that increases its share consistently annually, over decades, is a vital sign of stability.
However, be wary of companies with high yields, which is calculated by dividing a year’s worth of dividends by the stock price. This can be a sign that a company is paying high yields out of desperation in order to keep investors or attract others to reinforce their income stream.
Additionally, companies that withhold dividends may not necessarily be in trouble but need more cash to pay immediate expenses, unexpected short-term expenses, or when expecting lower earnings. Keep a watch over short-term problems to ensure they aren’t becoming long-term, otherwise, it may be time to reevaluate your investment.
It is sometimes difficult to quantify a qualitative assessment of the company’s leadership, but it is essential because good executive command makes all the difference.
Case in point: Steve Jobs returning to Apple. Before his return in 1996, Jobs found himself in a power struggle with John Scully, who he had brought in personally in Scully. Jobs resigned in 1985. The board ousted Scully in 1993. By 1994, Apple was near bankruptcy. The company ousted then-CEO Gil Amelio and rehired Jobs as interim CEO. In 1997, Jobs went out and got a $150 million investment from major rival Microsoft. Dell CEO and cofounder Michael Dell said Jobs should shut Apple down. But by 1998, Apple was profitable again, thanks to its introduction of the revolutionary iMac codesigned by Jobs and new talent Jonathan Ive, Business Insider reports. Now, Apple is one of the most-valued, wealthiest companies on the planet, with more revenue than the US government.
Steve Jobs is considered one of the all-time greatest company leaders, and his example is the difference the right leadership can make.
By its very nature, the stock market is volatile. All companies move up and down. What you’re looking for are investments with long-term stability and, thus, lower risk. The economy, worldwide events, interest rates, and more will all affect companies across the board or certain companies in specific ways. Look at a company’s long-term performance to view how it has weathered the cycles of various events. Has the company remained stable? If the company took a downturn, did they come back relatively strong? Companies that only have real trouble when everyone does are most likely the best bets.
Key things to look for:
A. Revenue growth.
B. Low-to-moderate debt levels.
C. Competitive in their industry.
D. Effective leadership.
Here are seven things to look for before considering selecting a stock, according to US News.
· Earnings growth trends.
· A company’s strength in comparison to its peers.
· Having a debt-to-equity ratio on par with industry norms.
· Market value in terms of a company’s price-earnings ratio.
· How a company handles its dividends.
· How effective executive leadership of a company is.
· Strength and stability over the long term.