Factors of a Company that can make a Good Investment
Perhaps the most important aspect of achieving investment success is having an eye for a prime opportunity. Part of the reason around 70% of all CFD accounts lose money is because of inexperienced traders making investments without understanding the market trends and stock behaviors. There’s a lot more to a smart investment than just an upward price trend…
In this section, we’re going to detail exactly what *we* look for in a company, before investing. This is not in any way professional advice, but a checklist written out of personal experience, with accrued knowledge and years of winning/losing investment decisions; shaping our views on what constitutes a clever bit of business.
The question we ask before committing to an investment:
What do the financial statements look like?
A company that has a poor financial statement gets an immediate ‘NO’ from us. We generally look for safe investment choices that have just suffered from a market downturn, so if things don’t add up on the statements, then it fundamentally goes against the way that we invest / trade.
The factors we look out for in a financial statement:
As a general rule of thumb, we don’t tend to invest in a company that has a net debt of more than 5-10x the companies net profit. This ties in with what the company is/does as they may just be starting out and the growth rate could be accelerating at astounding speeds.
Essentially how long would it take to pay off said debt, if consistent progress is being made you may want to consider investing long term
Earnings per share
In its literal meaning; How much of the value of the shares is returned as earnings and how much is waste/overheads?
Price to Equity Ratio
Generally speaking, a high P/E ratio suggests that the market is expecting stock growth. However, we do make exceptions for the odd business that has a very well defined business plan and set of products.
Why would this company be any more successful than other similar companies?
Think about the future profitability of the business in the context of its industry/sector. Would investing in a small growing oil company be any more fruitful than investing straight into Shell or BP?
How is the rest of this sector performing?
Similar to the last point, would this investment be a smart long term move with the general shift towards greener energy? You may have found the most profitable stock in the sector, but if that sector is in decline you should consider whether the investment is a smart one.
Is it hitting all-time lows or is it hitting all-time highs?
Stock behavior is everything. You don’t want to bet too much on history repeating itself, but it’s a sure-fire way to get a clear indication of what type of performance to expect in the near future.
Keep up to date with the news
Always keep track of current affairs that may have an impact on the market. Brexit, Covid-19, and US-China/EU trade wars have all been external events that have had BIG impacts on stocks, so keep an eye out for stocks that may be open to being blindsided by global events.
These are the prime aspects that factor into our thinking when we invest or trade; it’s key to remember that you’re risking every penny you invest when making these decisions. Having a clear idea of what to look for definitely helps you avoid sure-fire losses, but it’s also important to keep in mind that you won’t be right 100% of the time.