Whether you're looking to invest in stocks, bonds, ETFs, or mutual funds, pinpointing your investment can be overwhelming. Here's a game plan to follow.
Know Your Objectives
First and foremost, knowing your risk tolerance is essential. Some investments, particularly low liquidity equities, are far riskier than others.
And what's your time horizon? If you want to get rich quickly, investing is unlikely for you. While some stock traders can make a quick buck, true investing takes time and patience.
Being willing to take on some level of risk raises your potential for higher returns, but some prefer a slow and steady approach.
Determining your risk tolerance early on helps you find your investing style and stick to it.
Next, it's a good idea to gauge the overall economic environment. What are the current economic conditions and trends, and how might they impact your investment decisions?
In a strong economy, you may prefer stock market investing in areas that are likely to thrive, such as technology or consumer goods.
In a slowing economy, defensives are more popular, including health care and consumer staples, but you may avoid equities altogether and opt for bonds or defensive ETFs.
Along with the broader economic environment, market trends are worth watching. In 2020, the tech sector saw phenomenal growth, whereas, in 2021, it was the energy sector. Some sectors are cyclical, while others are driven by macro events or consumer sentiment.
Following market trends can help you identify investment opportunities and avoid pitfalls.
Keeping a watchful eye on industry trends via trade journals, online blogs and newsletters or networking with relevant people can keep you abreast of industry trends. Close analysis can help you identify companies or sectors poised for growth or facing challenges. Armed with this information, you'll be better ready to make confident investment decisions.
When considering a stock investment, it's wise to read the company's financial statements. This will give you a big-picture view of the company and help you make sensible decisions.
Your first port of call should be the income statement, balance sheet, and cash flow statement. These documents can provide insight into a company's financial health and performance. Metrics worth investigating include revenue, profitability, debt levels, and free cash flow to share price ratio. This will give you an investing edge as you better understand how the company is faring.
The integrity of a company's management and leadership team can give you a lot or a little confidence. Watching interviews, listening to earnings calls, and researching the team's track record can offer you considerable insight. Furthermore, as you uncover a clearer management outlook, you'll get an idea of their ability to steer the company in the right direction.
Professional investors look for leaders with a proven track record of success and a clear vision for the future.
So, you've heard Google is a great company, and you use its search engine daily, but do you really know what the company offers? Google is only one aspect of its parent company Alphabet (NASDAQ: GOOGL) (NASDAQ: GOOG), and there is much more to it than meets the eye.
While Google is a particularly prominent example, investors should take the time to really understand how a company makes its money before investing.
Once you know what products and services it offers, think about how sustainable its income streams are. Is it a disruptor, or could it be disrupted? Consider competitors, market saturation and growth potential.
Get to know its customers. Are they businesses or consumers? Are they high earners or low? Does it appeal to the masses or a select group? You'll then have a better idea of the size and scope of this company's target market, along with the strength of its brand.
Once you know what the company offers and understand its customer base, you'll have an idea of its target market size. An unsaturated market with much room for growth will provide longer-term potential than a company serving a smaller or declining market.
Finally, does the company innovate? Some of the most successful stock stories have been innovators, and companies at the cutting edge of technological innovation can be very attractive. But innovation can be costly and comes with added risk despite being a long-term growth driver. Gauge a company's track record and how it is positioned to thrive in the future.
We hope this checklist has been helpful. Here are some more points to consider:
Partnerships and collaborations: Associations, partnerships, collaborations and joint ventures can enhance credibility and increase investor confidence.
Regulatory environment: A company's operational and financial performance can be impacted, for better or worse, depending on its regulatory environment.
Legal and compliance issues: Company reputation and financial stability are at risk when it comes to legal and compliance matters. A company facing a lawsuit or being questioned over its adherence to regulations or ethical conduct could be a riskier investment than one free of these issues.
Political climate: The political environment can drastically affect investor sentiment and market performance. Understanding the region's political environment, you are investing in is essential.
Geographical expansion: Expansion into new markets is exciting as it brings new opportunities but can come with unforeseen risks.
Diversification of revenue streams: Diversification is an excellent way for a company to reduce risk in its market and industry.
Brand reputation and public image: A company's success often relies on its reputation and public image.
Intellectual property: A company's intellectual property (IP), such as patents and trademarks, adds value and competitive advantage.
Capital structure: How a company finances its operations and growth can affect its future success. Its capital structure can help you can determine its risk profile.
Valuation methods: There are numerous ways to value a company. You should start by reading the company's financial statements and using ratios to compare it with its industry peers.
As always, it's important to consider the company's overall financial health and do your due diligence before making investment decisions.