Warren Buffett has once said that he doesn’t invest in what he doesn’t understand. If the most prominent financial investor acknowledges that he doesn’t understand all companies, we should all probably take his advice. For starter, you should look into the company’s website and its history.
Make sure you check out its leaders as well: how long they have been with the company and their backgrounds. You should look for stability in management, and for leaders with strong backgrounds in the industry and their involvements in previous companies.
Competitors and Industry
For every Coke, there’s a Pepsi. Of course, the company you’re investing in has many other competitors out there as companies are constantly competing with each other.
So understand your company’s industry and where it stands. For instance, does this company have the biggest market share in its industry? Is it an industry dominated by one company, or is it a fragmented industry where the biggest player owns less than 10% of the market?
You might also need to read up on news that is related to your company and its industry to slowly grasp the game and business so that you can invest wisely.
How a company manages its money tells you a lot about how it handles stock market changes or unexpected events.
We know it can be overwhelming when it comes to numbers but you should pay attention these key components, as pointed out by ‘Stock Investing For Dummies’ when you look at a company’s two main financial statements – the income statement and the balance sheet:
Earnings: This number should be at least 10% higher than the year before.
Sales: This number should be higher than the year before.
Debt: This number should be lower than or about the same as the year before. It should also be lower than the company’s assets.
Equity: This number should be higher than the year before.
Look into the company’s annual report as well. While it also contains financial statements, it provides a broader scope that includes a letter from the CEO of the company, assessment of its annual operations and the companies’ view of the upcoming year and prospects.