What Do Smart Investors Look For When Buying a Stock

Smart Investors Look For When Buying a Stock

When it comes to being an investor in the stock market, determining what stocks to buy and when to buy them can be a tough endeavor, but it is necessary to make smart investment decisions. From both fundamental and technical analysis, there are metrics that can be looked at to determined when to take the plunge. It is not always a perfect science, and sometimes investors may not get it right, but nevertheless doing research is always key.

Smart Investors Look For When Buying a Stock

The first thing that an investor has to do with a company is to understand the underlying business model. What does their company do and how does it create revenue based on its product or service. Sometimes its business model may be straight forward like Coca-Cola, whose business revolves 100% around making a beverage and distributing it to consumers.

Other companies might have multiple revenue streams such as Microsoft, which not only make money on its Microsoft Office products but also on XBOX and its AI architecture. Not only do you have to understand how they make money on revenue, but also how well the company optimizes its profit based on what it produces.

The second perspective that an investor will look at is to monitor a company’s revenue growth over a period of time. This can be looked at quarter over quarter, or more commonly year over year. What investors want to see is a positive revenue stream and that the company is capable of continuing to expand its business, signaling there is demand for the company and its product. Top lines are usually very helpful in identifying a price target for stocks. An example is a company like Disney which would use current and future projected park admissions revenue as a key indicator towards a Disney price target.

After looking at revenue, which is commonly referred to as the top line, investors will then look at the bottom line, which is called earnings. They will usually interpret earnings as a ratio to the number of shares, known as earnings per share (EPS). Again earnings are important because it signals how well a companies margins are in relation to developing a product or supplying a service. For example, if a company produces good revenue, but has a hard time showing great earnings off that revenue, it may scare investors away because ultimately investors care about the bottom line, which relates to their profits.

After looking at these key measures, it’s important to know that the market operates on a supply and demand behavior. In other words, other investors will need to want a stock in order for its price to increase. Ultimately, an investor will want to be in stock before others do so that those who buy it after can help elevate the price. Price targets fluctuate based on changing sentiment from quarterly reports that indicate what revenue and earnings were and whether they were in line with investors’ estimates. Generally speaking, when revenues and earnings exceeded analysts’ estimates, the stock price will go up because the company is in a better-estimated position.

A lot of times investors will look at other secondary metrics to value what companies are worth investing in, pulling data from sources such as Yahoo finance. When choosing between companies’ main competitors, many analysts will look to price-to-earnings ratios as a sign of how companies are trading based on their valuation. A price-to-earnings ratio is sometimes referred to as a multiple and suggests how confident investors as a whole believe they will succeed in hitting their long-term price targets. While it may seem intuitive to buy stocks with a high P/E, it will present a risk to the downside if a company has setbacks. Alternatively, if a company trades at a low P/E, there may significant upside if they surprise.

There are many other metrics that an investor might use, but these are some of the basics. Ultimately, an investor has to take whatever information is available and make smart decisions and ensure they buy at the right price to get the best return. Time spent in the market maximizes returns more than the right price point since the market can get overheated at times, but, nevertheless, research must be done to ensure they make money for their customers.

Author’s Bio

Yunas Chaudhry is a super-connector with AYC Web Solutions who helps businesses find their audience online through outreach, partnerships, Photography, branding and networking. He frequently writes about the latest advancements in digital marketing and focuses his efforts on developing customized blogger outreach plans depending on the industry stainless steel tongue scraper and competition.