This is a very short but extremely helpful guide on how to buy companies on the stock market. Read and apply to your own investment situation.
1. There must be strong economic environment in the future, ideally for the next 5-20 years. So the company can generate solid and increasing sales revenue in the long-term. For example, high demand for the coronavirus vaccine from pharmaceutical companies or high demand for renewable energy sources as the whole world is switching from polluting coal to clean energy. Otherwise, there will be no decent sales revenue to ensure profits while costs will need to be paid and will keep on increasing due to inflation.
2. The company must have knowledgeable and experienced management that will ensure healthy performance of the business. So profitability, efficiency and liquidity can be appropriately managed. Otherwise, there will be no profit or low profit, liquidity problems will happen (either too low struggling with paying short-term debts or too high with cash being underutilized) and low efficiency of capital meaning available resources are not being efficiently allocated. Learn more about Ratio Analysis.
3. The company must offer reasonable share price, specifically P/E Ratio being no higher than 20 and the share price being in the lower end of 52-Week Average. So investors can generate returns faster. Otherwise, if a company is currently overpriced, it will take too much time (five to 10 years) for investors to generate decent returns.
4. The company must be a business with long history of dividend payments (sharing a part of the profit with investors) and a business run ethically, meaning honest management in the company offering products and services that are not harmful for the human body and the natural environment. So the business can be trusted in the long term and can prove itself as a reliable source of fixed income for shareholders. Otherwise, with unethical management, problems will emerge sooner than later and the share price will drop resulting in capital losses from investment.
5. Investors should minimize transaction fees. Ideally buy shares and keep those shares for a long time, ideally keep them forever while keeping on adding more shares. Alternatively, buy a low-cost index fund (below 0.5% in annual management fees). So, investors do not pay transaction fees too frequently when buying and selling shares over and over again. Otherwise, high and frequent transaction fees will reduce potential gains. You can check TD Ameritrade, Vanguard, Charles Schwab or Fidelity Investments for low-cost-index-fund investment options.
Wishing you successful investing only!
