Stocks, like many other financial tools, oftentimes come with some risk. For stocks, however, that risk could pay off big. Think early investors of Netflix or Apple.
While someone may be eager to put 20% or 30% of their portfolio into single stocks, others might take a different approach. The best thing about personal finance is that it is personal! Each person will have a different way of managing their portfolio and that is okay.
You get to decide for yourself what you do and do not find acceptable. You – not your mom or your friends – get to set the standards by which you will live and invest.
The 3 Key THings When ResearchIng Stocks
With anything in life, it is best to do some research before taking the plunge. It is always a good idea to research these three key things before you buy a stock.
1. The COmpany’s Present Financial Health
How is the company doing in terms of overall profit? Are they consistently exceeding their projected targets? Or, is the company currently in some financial trouble?
Sure, things can always turn around for a company. Take the Gamestop debacle for example. However, it is better to know the general financial health of the company you are buying.
Public companies have to report their earnings and profits to their investors. This report is usually shared with shareholders – you – via email or through the mail. It is also available for free on sites like Morning Star or Yahoo Finance.
The company report is a summarized document that can help guide the decisions of would-be stock investors. It shows you metrics like past dividends payouts, net profit and cash flow. These are all key metrics that helps you better understand the company’s overall financial health.
2. The Company’s Management Team
Who is actually working over there and how do they work? For instance, is the C-Suite full of people with somewhat of a moral compass? Does the company tend to hire a diverse team of directors and managers with varied backgrounds and skillsets?
You can usually find the top leadership team on the official company website. I implore you to at least check out the background of the CEO and the CFO.
Next, you will want to Google those individuals and see what they are all about. Where did they work prior? What changes did they bring to their previous roles?
Thinking through these questions will help give you insight as to what new and innovative ideas they may have for the company.
3. The Projected Market Growth Of The Company
There are two types of analysis usually done by economists to better understand the projected growth of a company. One of the methods is called fundamental analysis. It aims to get the future value of a company as compared with the current stock price.
The second method is called the technical analysis. Technical analysis uses data like trading volumes, moving averages and the trading price of stocks to predict the company’s future stock value.
Both are great tools for investors that want to consider long-term returns. You can most likely find this information on sites like Seeking Alpha.
The Choice Is Yours
Investors must have a baseline understanding of the company they are interested in. Going over these three components gives you just that!
Once you have completed your stock research, you will have a better idea of which companies you want to invest in and be on your way to building wealth.
I personally like to keep my total portfolio under 5% for individual stocks. It just helps me sleep better at night.
The rest of my money I like to put towards index funds. This is because index funds gives me exposure to several companies all at once.
Like I said before, personal finance is personal. You have to find the balance that works for you. Let me know down below what percentage of your portfolio is in single stocks. I am curious to see where we all land.