4 Points To Pay Attention To Before Investing In Stocks

Before investing in a stock, are there four basic things to consider? The following four points provide an analytical framework for important, important and safer investment practices. Although it is impossible to control the risk or potential volatility of the financial market, if these four types are applied to each stock, it can provide better risk adjusted stock options. They can help you become more picky in the stock market. Because there are several criteria to consider in these four matters.

Four points to note before investing in stocks are:

1. Basic analysis

2. Relative and absolute evaluation

3. Macroeconomic environment, business cycle and industry, stock industry

4. technical analysis

Let’s further analyze these four points.

1. Basic analysis. Financial analysis examines financial ratios to examine very important factors that may affect stock prices. There are four types of financial ratios: profitability, leverage, liquidity, operational or efficiency ratios. These financial ratios combine income statement and balance sheet data, such as income and earnings, to determine whether the stock is attractive and has future growth potential. If you remember to buy stocks, you will become the owner of the company. Even if the proportion is small, it is wise to buy basically safe stocks. The company’s stocks are characterized by profitability, reasonable debt or even liability system, sufficient liquidity, and effective use of assets by the management to create more wealth and added value for shareholders. At the same time, we should also analyze the trend of this financial ratio, review 3-5 years, and see what changes have taken place. Is the net profit margin rising? Is debt increasing? Don’t ignore the importance of cash flow, operating cash flow and free cash flow. Stocks with natural price increase due to increase in cash flow shall have priority over other stocks without cash flow. Can you buy shares in companies that are likely to go bankrupt in the short term? These valuable information can be reflected through thorough basic analysis. Take time to read the 10-K and 10-Q reports issued by listed companies. Please continue to pay attention to the economic news of specific stocks that the portfolio is interested in.

2. Absolute evaluation with competitors. Once you have a basic analysis of the stock, you should check its relative and absolute evaluation. When trading on a stock exchange, the prices of large stocks may be too high compared to the observed prices. You don’t want to pay an unreasonable price. It is better to buy low rated stocks and short high rated stocks. The popularity rating ratio of all stocks(such as P/E, P/Sales, P/Cash flow and P/Book Value) can be compared with the relative rating ratio of the whole market, industry and related industries. Review the trend of this percentage over time again. Is the stock relatively undervalued because its recent yield has been at an all-time low in the past three to five years? although the absolute evaluation is much more difficult, many financial websites are prepared for you at a reasonable cost. The absolute assessment risk is that in all DCF or DDM models, small changes in inputs and assumptions have a significant impact on the fair value or intrinsic value of the stock. However, this absolute assessment should also be considered carefully before buying or selling shares.

3. Macroeconomic environment, business cycle and industry, stock industry. All enterprises operate in an economic environment with restrictions, restrictions or risks. In the broader financial analysis, there are two main types of stocks that can be analyzed. Top-down analysis and bottom-up analysis. In short, the top-down approach is to first look at the results of the world economy, then examine business sectors and industries, and finally select the best stocks in specific sectors and industries. The bottom-up approach is the opposite. As many analysts recently expressed concern about the slowdown of world economic growth in 2019, if there is a slowdown in late 2019, it may become a staple food for public utilities, real estate, medical care and consumption.

4. Technical analysis. Finally, timing is important for stock investment. Technical analysis can add more value to the basic analysis of all stocks and provide the opportunity to buy or sell stocks as accurately as possible. Technical analysis is all about probability. In any case, it is 100% correct. However, if it is used, it can improve the probability of buying the so-called oversold stocks with good foundation and gain profits. Or sell stocks that look overbought and have fallen. Although there are many technical analysis indicators and strategies, you can start with very simple indicators, such as the crossing and trend of important moving averages(such as 20 and 50 moving averages).

In a word, these four things can help you to be realistic, analyze any stock, improve the probability of selecting stocks that meet your criteria, and establish a reasonable profit base. Instead of gambling, you will conduct reliable financial analysis, which can adjust the risks taken to compensate for the expected reasonable rate of return.