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Ways to tell if a stock is worth buying or not

Rex

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Investing in stocks can be like gambling. But if you research and learn a lot about investing and companies, you’ll most likely succeed. To get you started, we are discussing 9 ways to tell if a stock is worth buying.

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How To Tell If A Stock Is Worth Buying​

Buying stocks can be a great investment for your future. We all have heard stories of people buying shares of a few companies and turning huge sums of profits over time.

Some of them even made millions. As someone who has any connections with the investment industry, you probably know Berkshire Hathaway. Statistics say that if you had invested $10,000 in Warren Buffet’s company in 1964, you’ll have over 200 million dollars as of May 2020. That’s a 20% of compound annual growth rate.

Now is it possible for everyone? Maybe. But there are plenty of factors involved in this company’s growth. And don’t forget the time factor: we are talking about over five decades here.

But the basic principles remain the same. To ensure that you have a good amount of money when you retire (or even way before that), learn a lot.

You might make good money by just gambling on a few companies. But if you want to stay in this business for the long-run, research a lot and be patient. To get you started, we are talking about a few ways that will help you decide if a stock is a good buy or not:

Ways To Tell If A Stock Is Worth Buying​

Price​

Investing in stock means owning a piece of business. If you invest with this strategy, you are going for long-term success. But if you think that you just want to make short-term profits, you might end losing more than earning.

So the first thing to look at when determining the worth of a stock is the price. It will let you know how much it will cost you to buy a share of this company.

Some companies split their shares, so the price of one share is low. But collectively, they have a lot of shares. Other companies don’t do that. Nonetheless, the price will determine how many shares you can purchase with the money you have.

Revenue Growth​

Most of the time, share prices increase with the company’s growth. And when a company is growing, it means its revenue is growing as well.

However, don’t look at revenue in a vacuum. Instead, check if the company is growing in revenue from one quarter to the next or one year to the next. And if you see a downfall in revenue, make sure that you know the reasons behind it before you invest.

Earnings Per Share (EPS)​

You get EPS by dividing the money company has at the end of each quarter and the number of shares sold. If a company made $35 million and sold 20 million shares, EPS is $1.75.

EPS can help determine the worth of stock. Most of the time, higher EPS means a better stock. But this is not a universal rule because companies can do unethical things to increase their stocks' prices without increasing profits.

Dividend and Dividend Yield​

Some companies give investors a portion of their profits. This portion is known as dividends. Many top companies do this every quarter, so these kinds of companies are lucrative for investors. Investing in them can get you more profit than a normal bank.

You can also look at dividend yield that is dividend divided by the share price. Companies with high dividends can be a sign of a good investment. You can find these companies, but it requires some research.

Never be lazy about researching. You never know researching a few hours might get you a company that will make you a millionaire!

There are a term "Dividend Aristocrats" that is designated to public companies that have a record of distributing and increasing their dividends for at least 25 consecutive years. These companies can be a great investment.

Note that not every top company gives dividends because they like to invest everything back into their business. Amazon is a big name that does that.

Market Capitalization​

Big companies do not always guarantee a great investment. But you have more chances of steady growth if you invest in them. Market capitalization (also called a market cap) is a good parameter to determine a company’s size. It’s the combined value of all its shares.

Companies with a high market cap mostly don’t get affected by a singe bad news. Take the example of companies like Coca-Cola that have given good returns over the years.

Historical Prices​

There are ups and downs for every company. So it might be unwise to look for a company that can give you high profits in a very short period.

But in the long-term game, look at their five, ten, or even 15 years of returns instead of just looking at current price performance. It will give you a sense that this company can withstand hard times. It’s not a guarantee that this company will stay good in the future but can at minimum be illustrative.

Analyst Reports​

Some investment firms have teams that research and analyze different stocks. They provide reports on individuals stocks with a rating of “buy” or “sell”. Note that these analysts have different opinions, so don’t make your investment decisions based on one report. Read several reports before making a decision.

The Industry​

Analyzing a stock without looking at the industry is not wise. When you examine the industries, you’ll know which sector or business is very promising. Take the example of the food sector. If you are interested in McDonald’s, look at the entire fast-food sector. That will let you know people’s eating habits.

This type of research informs you about the positive or negative influences that may not be immediately reflected on a company's share price or balance sheet.

Major Economic Indicators​

It’s not in the hands of companies to control all factors affecting their business. The economic conditions of a country or world can be a factor in a company’s performance. Unemployment and change in people’s interests can profoundly impact a business. While being two different things, the economy and stock market connect somehow!

Most of the time, good economic conditions mean companies do well. And the downturn in economies can decrease the growth of a company.

Did we cover everything? Do you have your own way to tell if a stock is worth buying? Let us know in the comments below!

Disclaimer: The investment insights offered in this article are provided for informational purposes only. If you have any doubts as to the merits of an investment, you should seek advice from an independent financial advisor.
We are not liable for any loss caused, whether due to negligence or otherwise arising from the use of, or reliance on, the information provided in this article.
 
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Austin

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Nice writing up, that’s what newbies need to get started
 
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