You have studied the stock, observed it gaining ground day after day and you finally want to buy. However, before you do, have you examined what exactly you are buying? A little bit of research before placing an order might prevent you from being influenced by hype, FOMO or a sudden change in the markets. Whether a novice or an experienced investor, these eight questions will guide you to better-informed decisions about your investments.

1. What Does the Company Actually Do?

Investing in any stock requires understanding what the company does. What kind of goods or services does it offer? What are the clients of the firm? How does it earn its money? Is the business based on specific goods, client base, suppliers or market conditions? If you fail to describe the business simply, consider researching it first.

2. Are Revenue and Profit Growth Trends Getting Better?

Performance in the past does not predict future success; but it can be helpful nonetheless. It is necessary to consider revenue and profit trends over several years rather than just focusing on one-quarter successes. This is because growth means that the business is doing well while decreasing and erratic profits need to be probed further. Moreover, you need to find out whether the firm is able to make money from profit growth.

3. What Is Its Level of Debt?

While borrowing might be helpful for company expansion, there comes a point where borrowing becomes an issue. You should examine how much a company owes and whether it is able to produce cash to pay down debts. High level of indebtedness will put more pressure on a company when it faces difficult sales or interest times.

4. Is the Stock Overvalued?

Not all quality businesses are suitable investments at all times due to the prices they trade at. Take into account valuation metrics like P/E and P/B ratio and how they compare to the business’ historical valuations and other firms in its industry. It’s not about finding the most undervalued stocks – rather, it is about making sure that the stock that you’re buying at that particular price looks reasonably priced.

5. What’s Going On With Promoters’ Shareholding?

Changes in promoters’ shareholdings in firms where there is a significant shareholding stake from the promoters can be a source of useful insight. Have the promoters maintained the same shareholding stake or reduced/increased it? Additionally, check whether promoters have pledged a significant amount of their shareholding. The latter may or may not be an issue.

6. Is There a Real Reason to Buy This Stock?

Find out what your motivation for buying this stock is. Are you buying it due to the fundamentals of the business being attractive, do you understand the growth prospects of the firm or because you read on the Internet that it might be the next multibagger? The main reason for buying shouldn’t be the increase of the stock price.

7. What Amount of Risk Are You Comfortable with?

Even though the stock may have very good fundamental parameters, there is always a possibility that something will go wrong and the share price will drop significantly. Think about how much money you are going to invest and how you would react if there is a significant drop in the price.

8. What If Something Goes Wrong?

This is one of the most often neglected questions by investors. Instead of thinking about “How much can I earn?” think about “What could go wrong?”. Think about competitors, government regulations, debt, drop in demand, bad management, innovation or high valuation.

Your Pre-Buy Checklist

Before hitting “Buy”, quickly run through these questions:

Don’t Make One Click Turn into an Expensive Lesson

Buying a share is very quick. Determining whether you should buy requires more effort and time. You don’t have to do a complete analysis of all aspects before every trade, but going through these eight considerations will allow you to take a step back and distinguish a genuine investment from a share that seems good at a particular point in time. The next time you’re about to press “Buy” button, think first. Look into the company, finances, valuation, risk and your own investment reason. Some moments spent analyzing now may save a lot of headaches in the future.

For more practical insights on investing, stock analysis and financial markets, explore Aetram.

Frequently Asked Questions

1. What’s the most important question to ask before investing?
Ask yourself: “Why am I buying this stock and what could make my investment thesis wrong?” This can help you make a more balanced decision.

2. What should I check before buying a stock?
Look at the company’s business model, financial performance, debt, valuation, promoter holding, risks and whether the investment fits your goals.

3. Is a low P/E ratio enough to make a stock attractive?
No. A low P/E can be useful for comparison, but it should be considered alongside earnings quality, growth prospects, debt, industry conditions and other fundamentals.

4. Should beginners check promoter holding?
Yes. Promoter ownership and changes in promoter holding can provide useful information when analysing a company.

5. How do I know if I’m buying because of FOMO?
Ask yourself whether you would still want to buy the stock if nobody else were talking about it. If the main reason is that the price is rising or others are making money, you may be acting on FOMO.