Before I buy any investment item, I take my time to perform due diligence. For instance, say I would like to buy a pot (have I mentioned that I like food?), I will first go window shopping – by going online (thanks to the internet) to assess which brands are available, reliable etc. once I have the brand(s) that I would like to have I will go to the shops (or market) to perform a physical inspection. In this case, I will look at the pot’s cover and body to make sure there is no dent and look at all the aesthetics around the pot(s) before I even think about buying anything.
Although investing in the stock market is not exactly like my pot analogy, the key similarity is all about inspection and investigation. DON’T JUST GO AND BUY ANYTHING THAT IS SOLD IN THE STOCK MARKET OR BUY BECAUSE SOMEONE ELSE HAS BOUGHT IT! You need to do your own due diligence.
Buying stocks or investing in stocks (in my opinion at least) is mostly a science than an art. You need to:
- Understand the company – how has the company performed over the last 3, 5 or 10 years? Is it profitable? Can it meet its immediate liabilities – that is, does it have sufficient liquidity? Does the company have solid solvency structures – in this case, can the company continue to operate in the long run?
Answering these questions will help you understand whether you should invest in the company’s stocks or not. A company that has both liquidity and solvency issues must be a no-no for your investment portfolio – flee!
- Read the industry/ sector – what is going on with the sector? Are there new policies coming that will affect the industry/ sector? Is the sector/ industry seasonal?
Answering these questions will help to evaluate whether to invest either in the specific industry/ sector or whether it is more expedient to move your money to another company in another sector/ industry.
- Appreciate the markets sentiments – what is going on with the economy? Is the government increasing taxes or changing their fiscal policy? Tariffs? Potential economic game changers? Looming recession? Are interest rates expected to go higher or lower?
Answering these questions can also inform you on how to invest your money in line with the general market outlook or if you are a contrarian (like myself) in the opposite direction as what market expects (well sometimes) 🙂
The list is not exhaustive but this article is aimed at helping beginning investors know what to look out for before choosing to commit their money in acquiring a stock, bond or ETF of a company or group of companies. The truth is, there are simple steps that can be followed to help you make these decisions – quite… easily!
As always, remember there is no 100% risk proof investment – just try to minimise your risk!