The 6 things to look for when investing in the stock market
1. Invest in consistently profitable businesses.
Ideally we want to reduce risk. We prefer to invest in companies with stable revenue and earnings. Generally companies with stable earnings tend to weather the storm better than those companies that have volatile earnings. By volatile earnings I am referring to companies that report a profit one year and a loss the next.
2. Don’t buy a story
Many unsuccessful investors buy a sexy story. What is going to be the next growth area remember the ‘dot.coms’ and ‘rare earth resources’. You are investing in a business with your hard earned money. Don’t invest in a company that does not generate positive cash flow. You don’t want to provide a company with your equity to see it being spent on wages, overheads and extinguishing debt. You want to invest in a company that generates a positive cash flow and is expanding its service offering.
3. Big is beautiful
Whilst big companies, and I mean companies with a market capitalisation of $1Billion dollars have gone bust in the past there is a greater probability of a small cap company going broke. In the tough times a larger company is more likely to source finance than a smaller company.
4. Invest in a business that provides a core product or service.
An example here is the four major Australian banks. It is generally costly and time consuming to change your banking needs from one bank to another. It is also difficult to compare their various fees and charges particularly fees such as merchant costs.
5. Does the company have a good reputation?
Generally companies that offer good customer service and handle problems quickly and efficiently have satisfied customers. Satisfied customers tend to be loyal and make repeat purchases. They tend to be less concerned with price as they have a strong affinity with the brand. An example of this type of company may be Johnson & Johnson particularly their baby care products.
6. Monitor and review your investments regularly.
Subscribe to reviewing the financial reports of these investments. Read the various reports. Has the revenue increased this year and why? Have the profits increased and why? Is the company expanding? You can generally sense by reading various reports whether the company is in repair mode, growth mode or somewhere in-between.
Should you have any questions in regard to investing in the stock market please feel free to contact
Peter Quinn by submitting an online enquiry or calling us on +61 2 9580 9166 to book an obligation free appointment.
The information in this document does not take into account your personal objectives, financial situation or needs and so you should consider its appropriateness having regard to these factors before acting on it. It is important that your personal circumstances are taken into account before making any financial decision and it is recommended that you seek assistance from your financial adviser.