Four Factors To Consider Before Purchasing A Stock

Getting into the stock market requires an investor to be armed with information. Common sense investors looking to build stable portfolios need to avoid a “get rich quick” mentality and choose their stocks based upon careful research and proven growth in companies. Consider these following tips before you invest in a particular company.

Know the difference between stable and growth stocks.

We are currently locked into a bear market, which is a reflection of the United States’ stagnant Gross Domestic Product. Investors have reacted to fluctuating stock markets by moving their funds into more stable and, therefore, less profitable stocks. The collapse of the Internet stock bubble, the housing crisis and the debt crisis has provoked less speculation on the part of wary investors.

You can choose to ride out the current Great Recession with a diversified portfolio or play loose and fast with more volatile stocks. The latter has been proven time and again to be a failed strategy. It’s up to you to understand your risk potential and plan accordingly.

Understand a company’s price/earnings ratio (P/E).

The first step in gauging a stock’s value is dividing the price of the stock by the company’s earnings per share. This is an important tool to understand which companies to invest in. Companies that have inflated stock value, but little by the way of earnings, do not pay as much in dividends compared to proven earners.

Know why you will invest in a particular company.

Study your company inside and out and understand its worth to the economy. Is it fundamentally sound, well managed and expansionary? Then it should deserve a look. Inquire about their P/E, dividends and yields. If the company has shown consistent growth over ten years then it is a safe investment.

Get the Bigger Picture

Understand the bigger picture surrounding your particular company. For example, Borders Inc. showed consistent growth in the big box store market in the late 1990’s. Their aggressive growth was matched by a steady stock price. However, they did not adapt well to the changing market in content delivery. As consumers changed their shopping habits and turned to electronic books and MP3 players; Borders physical market tanked. As of 2010, Borders, Inc. has been liquidated. They could not compete with the changing times and become innovators in the e-reader market.

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