3

This is a general question so I will create a test case to give it a bit more direction.

Let's consider that I am intersted in buying shares of MadeUpCompany Inc - a tech company that has been around for a while. I don't know much about them apart from what they produce; maybe I like their products which is why I want to invest in them.

Before jumping straight into it, I want to make an informed decision - is my investment likely to make me money based on X criteria?

What are the key things to research about the company and its past performance before buying their stocks?

For example:

  • Find out the P/E ratio and how it historically fluctuates when the company releases a new product.
  • How stable the stock is (how can I do that?).
  • Do they pay out dividends.
  • Check if the owners of the company are buying or selling shares in their own company.

Thanks.

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I have my "safe" money in index funds but like to dabble in individual stocks. My criteria and thought process are usually like this, let's use SBUX as an example:

  1. Understand what the company does. Also paraphrased as "buy what you know". A profitable/growing business doesn't need to be complicated. Open stores. Sell coffee. For SBUX, my decision process literally started inside a store: "Rocky, why are you standing in line to overpay for coffee? Wow, look at all these people! Hmmm. I wonder if this is a good stock to buy?"

  2. Check out their fundamentals. Are they profitable? P.E.ratio, book value, and PEG are helpful, and I tend to use them as a gauge for whether I think the stock is overpriced or not. I compare those values to others in the industry. SBUX right now has a PE of ~30, which looks about average for its peers (PEP, KKD, GMCR). So far so good.

  3. Does it pay a dividend? This isn't necessarily good or bad, just useful to know. I like dividend-paying stocks, even if it means the stock price might not grow as aggressively. Also, a company that pays a dividend is naturally confident in its ability to turn a profit and generate cash. So it's a safer pick, in my opinion. SBUX pays a dividend, a small one, but that's a plus for me.

  4. Am I willing to watch the stock? With my index funds, I buy and forget. With my stocks, I keep an eye on the situation, read the news, and have to make a buy/sell decision regularly. With SBUX, I don't watch all that closely, I just keep up with the news. IMO, it's still a buy based on all the above criteria.

And I feel less silly now standing in line to overpay for coffee.

  • 3
    You're basically buying coffee from yourself ;) – quid Feb 23 '17 at 20:20

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