Investing In Stocks: 10 Tips
All investors must know about investing in stocks, so here are10 tips to minimize risk, maximize return, and protect your investment. Investing in stocks has the potential for significant gains – and significant losses. A thoughtful, organized and deliberate approach to investing in stocks will yield the best results.
- Invest in what you know. Through your job and everyday living, you have no doubt become familiar with many companies and products. It is always best to understand your investments, which makes investing in companies you are familiar with an excellent idea.
- Know the company’s management team. A solid management team that has guided the company to profitability or through hard times is an excellent asset for a company and that company’s future stock performance. A proven management team that can navigate crises improves stock performance when unexpected situations arise.
- Research outstanding litigation. Investing in stocks is a risky business, even riskier when you do not do your homework. Read public filings and research the company to determine if there are any outstanding court cases which may affect future profitability – and future stock price.
- Read the company’s annual report (10-K). All public companies, and many private companies, file annual reports with the Securities and Exchange Commission. These reports are valuable resources of information, covering operations, marketing, product lines, financials, and litigation. Scour these reports for any problems or bright spots other investors may not see. These may give some guidance as to future stock performance, either positive or negative.
- Understand the company’s financials. Knowing the company’s assets, liabilities, and profitability will help you make sound financial decisions. Is there a large debt burden coming due? Can the company make all their interest payments in the foreseeable future? Analyzing financials is one of the best ways to make stock picks.
- Read the most recent investor’s presentation. Many companies make these available online at their company’s website. The investor presentation will give guidance as to the firm’s most recent performance and thoughts on future profitability.
- Understand what makes a stock price move up or down. Theoretically, all future profits of a company are baked into the current stock price. If you believe current estimates of profitability are too high or too low, then you believe the stock price is not correct. Invest in stock where you believe the majority of investors have underestimated future profitability.
- Read third party research. When investing in stocks, the opinions of third party researchers can be invaluable. Find a respectable research agency and see what they think about the company. Understand that their opinions may or may not be right – but also be aware they have full-time professionals paid to follow that company and their stock.
- Read the company’s most recent quarterly statement (10-Q). The 10-Q, or quarterly statement, is filed with the Securities and Exchange Commission for all public companies and some private corporations. These reports give a detailed analysis of the most recent operations and financial picture of the firm. Any headwinds or tailwinds the company might be facing are detailed here, and may give an indication of the short-term movement of the stock.
- Understand the stock’s investor base. A concentrated investor base in a stock means that one invested party might have significant effect on the short-term movement of the stock price. If a heavily invested investor sells, stock price is likely to fall. Likewise, if a heavily invested investor buys more shares, the stock price might rise. See if the investor base is concentrated to determine if a few parties have undue influence over the stock price.
Investing in stocks is a tricky business. It is an art, not a science… but potentially a very profitable art!