Whether you plan to buy individual stocks on the stock market or invest in bonds, mutual funds, or almost any other security, doing your due diligence is essential. That means researching every investment before you buy it.
Publicly-traded companies are required to submit certain paperwork to the SEC each year. These documents include information about the company’s revenues, expenses, account balances, and more. You should read these documents carefully and make sure you understand what they contain before investing. For example, if a company has high debt, low cash balances, and falling revenues, you can find that out in the company’s annual report. Given the high risk of such a company, you might not want to buy shares unless you’re willing to accept that risk.
Some popular metrics that investors look at when researching stocks include price-to-earnings (P/E) ratios, earnings per share (EPS), and return on equity (ROE). These metrics can help you compare different businesses that you might invest in.
Another strategy that some investors use when researching companies is technical analysis. Technical analysts look at stock price charts and try to identify patterns, then relate those patterns to how the share’s price will change in the future.
For example, technical analysts believe that a stock’s daily price passing above or below the price’s long-term moving average indicates future gains or losses for the stock, presenting a good buying or selling opportunity.
Regardless of the strategy that you use to research stocks, having a strategy, knowing how to implement it, and taking the time to do your due diligence are essential.
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