Questions to Ask Before Buying Stock
Are you considering a stock purchase? While investing in the stock market has the potential to be extremely lucrative, those who make big money in stocks don't go into it blindly. If you've got your sights set on a company, make sure to do your homework before taking the plunge by asking these important questions.
What Does the Company Do?
If you're considering investing in a lesser known company, be sure you understand the products and services that the company provides. Ask yourself if these products will be relevant in a year. You don't want to invest your money in a fad.
What Are Its Profits?
The fact that the company in question rakes in a million dollars in sales doesn't mean much if it isn't making a profit. Without surplus cash to back it up, your company may be at a higher risk for going under. Look for a return on equity (ROE) of at least 10 percent and a return on assets (ROA) above 5 percent. Find these on the stock's quote page.
Is the Company's Growth Well Known?
If you are considering investing with a lesser known company, it's best to get in early. Investing early means you may get the biggest bang for your buck, as growth stocks often eventually plateau.
What About Debt?
Avoid companies with a financial leverage ratio (company's total assets divided by shareholders' equity) of more than 5.
What Is the Forecast?
Zacks Investment Research analyzes trend information to create earnings forecasts for each stock. View your company's earnings forecast on its stock page to better predict future performance.
Unique or Common?
Ask yourself if the company is providing an original product or service. Netflix is a great example of a company that launched a unique service (home rentals from the Internet) and has been at the forefront of its industry.