These days, a lot of young adults in the U.S. are wary of investing in the stock market.
This isn’t particularly surprising, especially when you consider the fact that a lot of them came of age during or around the crash of 2008.
If you’re part of the majority of young adults not investing in stocks, what’s your reasoning? Are you worried about the risks? Do you not know which stocks to buy?
If you’re not sure what to look for when buying stock, keep reading.
Listed below are seven important factors to keep in mind that will help you make wise investment decisions.
Benefits of Buying Stock
Before we get into what to consider when buying stock, let’s first go over why it’s beneficial to invest in the stock market. There are a lot of benefits that come with buying stocks, including the following:
- Grow wealth more quickly
- Earn additional income from dividends
- Take ownership in and contribute to businesses you believe in
Buying stocks also adds some risk to your investment portfolio. This might not seem like a good thing at first.
The truth, though, is that a little risk can yield big rewards later on. The key is to take calculated risks and choose the stocks that are likely to provide you with the greatest returns.
What to Look for When Buying Stock
In order to experience the benefits the stock market has to offer, you need to choose the rights stocks. Here are some tips that will help you ensure you’re investing in the best businesses:
- Know What the Business Does
Start by doing some basic research into the business in which you’re considering investing.
What do they do? In which countries do they operate? What is its mission?
The more you know about the companies in which you’re considering investing, the easier it will be for you to decide if you want to give them your money.
- Consider Price-to-Earnings Ratio
Consider the price-to-earnings ratio of a company’s stock, too. The price-to-earnings ratio refers to the relationship between the company’s current share price and per-share earnings.
In most cases, a high price-to-earnings ratio indicates high anticipated growth in the future. Companies that are losing money (and, therefore, likely not good to invest in) do not have a price-to-earnings ratio.
- Look for Dividends
If you don’t want to have to pay a ton of attention to your stocks but want to ensure they’re still earning you money, it’s a good idea to look for dividends. This is like the interest that accrues in a savings account.
Check a stock’s dividend rate before you purchase it and look for ones with high dividends. This will allow you to invest your money and know it’s growing without having to do a lot of market monitoring.
- Consider How Long You’re Willing to Own Stock
As a general rule, it’s best to only buy stock in companies that you’re willing to stand by for several years. If you’re not willing to own stock for at least five years (if not 10, 15, or even 20), you’re better off not buying it at all.
Remember, if you’re constantly buying and selling stocks to try and stay ahead of the market, you run the risk of losing everything.
- Know the Stock’s Intrinsic Value
Warren Buffett recommends always looking at a stock’s intrinsic value before buying it. Intrinsic value refers to the true value of the stock.
In order to figure out a stock’s intrinsic value, take a look at the company’s assets. Then, subtract its liabilities to figure out the company’s basic net worth.
You can also talk to a broker or financial advisor to get a more in-depth look at a company’s intrinsic value before you decide to purchase stock.
- Calculate the Enterprise Value
You should calculate a company’s enterprise value as well before deciding to buy their stock.
To learn a company’s enterprise value, start by adding up the market cap and the company’s debt, as well as its minority interest and preferred shares. Then, subtract the company’s cash and its cash equivalents.
- Learn to Read Charts
The better you are at studying market news and learning to read an investment’s chart, the better off you’ll be.
As a general rule, if the chart begins in the lower left corn and ends in the upper right corner, that means the company’s value is growing. If it heads in the opposite direction, the company is losing money and isn’t a good one to invest in.
If you see that a company is losing money but you believe that may change, put it on your watch list and keep an eye on it.
Bonus Investment Tips
There’s a lot to keep in mind when you’re looking into buying stock in a particular company. If you do your research, though, you’ll be much better off than if you’re just choosing stocks willy nilly (or not choosing any stocks at all).
If you’re still not feeling confident in yourself as an investor, here are some additional tips that can be helpful to you:
- Set Long-Term Goals: Know what you want to do with the money you earn from your investments (retire, buy a house, save for a kid’s college fund, etc.)
- Know Your Risk Tolerance: Be honest with yourself about what you’re comfortable losing, and don’t invest more than that
- Avoid Emotional Decisions: Avoid making permanent investment decisions based on temporary emotions; keep your wits about you and think things over carefully before you decide to buy or sell a particular stock
Be sure to avoid leverage, too. Buying stocks with borrowed money is a recipe for disaster for a lot of people, especially inexperienced investors.
Start Buying Stock Today
The idea of investing in the stock market can be a bit overwhelming at first.
If you’ve been nervous about becoming a stock market investor or worried about what to look for when buying stock, hopefully, the information in this post has given you some more insight into the process.
It’s not as intimidating as it seems in the beginning. As long as you’re careful about the stocks you choose and avoid investing more than you can afford, you likely won’t experience any problems.
Do you want to learn more about investing in the stock market? Check out the Financial section of our site today for more advice and information.
