There are several questions that successful investors routinely ask themselves before every investment decision. Although answering these 5 questions will not always ensure you considerable gains, they will allow you to stay in the right direction to make the most thoughtful, informed decisions, and therefore, the most successful possible.
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What Factors Determine the Price of the Share?
The price of individual shares is subject to various factors, and their stock market prices very rarely reflect their “intrinsic” value. The main factors determining the share price you should pay attention to are supply and demand, market cap and profit margin of the company and overall economic trends.
The price of a share depends not only on the company itself but also on the “mood” of the markets and its industry position. Indeed, the price of a company’s share is strongly affected by its direct competitors’ activities, particularly in the new technologies sector.
Is This Company the Most Attractive in The Sector?
Often, individual shareholders tend to invest in their favourite companies that they love. In that case, the bond with the company is emotional before being thoughtful, which can generally lead to ignoring other more attractive companies in the sector. The thoughtful investor will consider all the companies in the same industry before choosing to invest in one or the other.
You may like Company A, its products, being a customer of them, but prefer Company B for your stock market investments if you find that Company B has higher profit margins and significantly less long-term debt.
Also, think in terms of sectors in which to invest or not and then select the best company or companies on the market. Buying hi-tech stocks would be a great decision at this particular moment. To determine which high tech company to invest in, you need to do your due diligence.
What Profit Can I Expect from This Share and On What Horizon?
It is perhaps the most obvious and the most important question to ask before buying a particular stock. In any case, this is what a seasoned investor like Warren Buffet will ask. The anticipation of asset performance is fundamental in any purchase. Do you think X share will return close to 3%? Or think the share price will be multiplied by 2 or 3 quickly? And on what horizon exactly? In 2 years? 5 years?
If you expect the stock price to rise significantly, but within 3 to 6 months, this gives you time to see it coming. Hence, no need for a rush. Conversely, if your anticipation foresees an increase in the share price very quickly (by the end of the month and the annual report release shows good numbers), you will have to act quickly.
Does Purchasing This Share Allow Me to Diversify and Hedge My Asset Portfolio?
You don’t buy stocks just for their dramatic upside potential. Buying stocks can also be a way of hedging certain positions taken on the financial markets.
Hedging involves buying an asset that will act in opposition to some of your other holdings. Let’s take an example. If the central banks raise or forecast interest rates to rise, banks should benefit while precious metals should fall. Let’s suppose you have a significant amount of banking securities in your portfolio. Then, it would be a wise decision to invest in gold or silver. If central banks don’t raise interest rates as expected, you may see your banking stocks go down. but you also will see precious metals stocks go up.
Is Management Transparent with All Shareholders?
Management actions should be consistent with announcements made to investors. If in the last three annual reports the management declares that it is doing everything to reduce the debt and speaks of it as an “absolute priority” but it pursues at the same time a policy of acquisitions and bought back several companies, there is a problem. A shareholder must be able to count on managers’ statements and have visibility on the actions that will be taken.