The stock market has always been a great way to increase personal wealth. While it isn’t without risks, if you do your homework and research your potential stock purchases, you can increase your net worth over the long run by creating a diverse portfolio of winning stocks. But what should the typical investor be looking for when choosing a stock? Here are five things that all purchasers should look for before choosing stocks of what companies to invest in for the long term.
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- Check Your Stocks Volatility
If you’re investing long term, one thing you want to look for is your stock’s volatility. While the market tends to go up overall, some stocks consistently rise while others are much more volatile and shoot up and down instead of steadily increasing.
The more volatile your stock tends to be, the greater the risk that you could lose money on it especially if it hits a sharp downturn when you are looking to sell some or all your shares in the company.
Stocks that are less volatile tend to be much safer bets and buying them helps limit your investment risk.
- What Are the Dividends?
Each year, stocks pay dividends to their investors based largely on the profit that the company made over the previous 12 months. The amount of the dividend each year is typically determined by the company’s board of directors.
Dividends help give investors a source of income for as long as they hold their stocks. This gives investors the opportunity to have a passive stream of income if they choose or to reinvest the dividend by purchasing more stocks in the company.
Whatever you choose to do with your dividends, a company that consistently pays high dividends usually provides investors with a safe choice that will increase the value of their portfolio.
- The P/E Ratio
P/E Ratio or Price to Earnings Ratio is another way to measure the relative value of any given stock. The P/E ratio measures the present price of a share of the company with its per share earnings.
This is a helpful tool when trying to determine the value of one company’s stock versus another’s, especially if the two companies are in vastly different areas of the economy.
The higher the P/E ratio, the more valuable the stock usually is to most investors. This is a fundamental basic way to keep tabs on the relative value of a company you are considering investing in.
Examining the trends of any company whose stock you are considering purchasing is always important. While some stock experts have rather complex charts that they use to measure trends, the basic rule is that you want any company whose stock you wish to purchase to be trending in a more profitable direction.
If a stock is trending downwards, you are betting that this will turn around and that the company will rebound. Be careful here because you don’t want to invest in the next Blockbuster Video or Radio Shack after these companies have passed their prime and are no longer able to make much money.
- Compare the Company with Its Competitors
Another factor you’ll want to take into consideration is the relative strength of a company in its own field. If you are going to invest in a retail company, for example, determine how does the company your are considering buying stock in compare to its three largest competitors. Is it a company that is growing or falling behind? Is there another company that is preventing this one from dominating the market?
These are all important factors to take into consideration before buying stock in any company. Follow these rules and you are more likely to make successful investments in the stock market.