The stock market was up last year which meant the indexes were up, however not every stock was a winner. Hopefully the investments you did buy were winners, but if they were not, in an article Jennifer Dowty offers advice on questions to ask before you buy a stock. One of the first is take your time to limit risk and try for the rewards.
- What does the company do? People buy for all kinds of reasons, that is understandable and one of the reasons is they hear from friends something, they have invested in. If you know what it does, if it is not doing it well, you can exit quickly. If you do not know, then you are gambling.
- What is the company’s revenue breakdown? All companies sell something to gain revenue, what are revenues? If you know the answer, in a quarter or two you can determine if revenues are doing better.
- How profitable is each business segment? Ideally the company makes a profit, it sells a product or service and after costs (EBITDA – earnings before interest, taxes, depreciation, and amortization). You want to ensure each quarter the margins it sells at continues to allow for profits.
- Is there growth – both top line and bottom line? Is the company’s revenue growing each year? how about their profits? Is the growth coming from internal or are they growing because the company is buying other companies?
- How leveraged is the company? Debt is a two edge sword, most companies need debt to operate, too much debt is bad; but in a low interest rate environment not using debt is not good.
- What is management’s track record? Ideally management will under promise and over deliver. Management sets out plans – did they meet or exceed them?
- Are earnings revisions positive or negative? Why are they changing their earnings?
- What is management’s outlook? If you do not listen to the conference call, many companies give you the opportunity to listen to the conference call through the company’s website – they can be very interesting to listen to.
- Does management have skin in the game? How many shares does the management own?
- What is the stock’s valuation? Is the stock a good buy right now from a valuation point of view.
Linking to dividend paying stocks, one of the golden rules of investing is try not to lose money. The questions above will allow you to determine when to sell. If all the indicators are what you want and you buy shares, the next big question is when to sell. If the indicators change, this is one of the reasons why buying a dividend stock can be easier. The big concern is for a profitable company will the dividend be increased? If the answer is yes, then enjoy the dividend and continue to hold the stock. If the answer is no, there are many other alternatives in the market and begin to move to the alternatives. You can park money in a Dividend index fund.
There are more questions than answers, till the next time – to raising questions.