Things you should look for in an investment
With so many investment opportunities it can be overwhelming trying to determine which one is right for you and your money.Yet by taking some time to do the needed research you can find the investment that works best for your objectives and needs. While there is never a sure thing (and if someone tells you there is-run!) there are some guidelines that can help clear away the confusion.Here are some things that you should look for in an investment-
- What are your reasons for investing in the company? Before you purchase stock in any company, you should ask yourself why you are interested in investing in that particular opportunity. It is important to realize that it is dangerous to fall in love with a corporation and buy it solely because you feel fondly for its products or people.The bottom line is that after all, the best company in the world is a lousy investment if you pay too much for it. You will want to make sure the fundamentals of the company (current price, profits, good management, etc.) are the only reason you are investing. Anything else is based on your emotions; leads to speculation rather than intelligent investing. Financial experts advise that you have to remove your feelings from the equation and select your investments based on the cold, hard data. This will require patience and the willingness to walk away from a potential stock position if it does not appear to be fairly priced or undervalued.
- Are you willing to own the stock for the next ten years?Many financial advisors tell their clients that if you are not willing to buy shares in a company and forget about them for the next ten years, you really have no business owning those shares at all. This simple but painful truth is evident on Wall Street every day. The guaranteed way to success in investing has historically been to select a great company, pay as little as possible for the initial stake, begin a dollar cost averaging program, reinvest the dividends and then leave the position alone for several decades.
- What is the price of the entire company? When doing research, it is crucial that you look at more than just the current share price.You need to look at the price of the entire company. The "cost" of acquiring the entire corporation is called market capitalization (or market cap for short). The definition of the market cap is the price of all outstanding shares of common stock multiplied by the quoted price per share at any given moment in time. This market capitalization test can help keep you from overpaying for a stock. Another useful tool to help gauge the relative cost of a stock is the price to earnings ratio (or P/E ratio for short). It provides a valuable standard of comparison for alternative investment opportunities.
- Is the company buying back shares? One of the most important keys to investing that any investor should know is that overall corporate growth is not as important as per-share growth. A company could have the same profit, sales, and revenue for five consecutive years, but still create large returns for investors by reducing the total number of outstanding shares. The same principle is true in investing. A shareholder should desire a management that has an active policy of reducing the number of outstanding shares if alternative uses of capital are not as attractive, thus making each investor's stake in the company bigger. When the corporate "pie" is cut into fewer pieces, each share represents a greater percentage ownership in the profits and assets of the business. Unfortunately many managements focus on domain building rather than increasing the wealth of shareholders.