Doing Your Due Diligence When Buying a Stock

due diligence when buying a stock

proper research when stock picking can make the difference

Doing your due diligence when buying a stock can make the difference between making money or losing it. Obviously, no one wants to lose money on an investment, so doing proper research is critical. This is by no means a comprehensive list, and many factors are beyond the scope of this short article, but here are a few basic things to look for when stock picking.

Company Health

Before buying a company’s stock you will want to be sure that the company has a healthy balance sheet and business model. Here are a few things to look for.

First, understand how the company makes money. What product or service are they providing, and how profitable is it? What is the long-term outlook for the company?

Does the company have a niche that is not easily duplicated by possible competitors? In other words, is there a high barrier to entry?

Research where the company is going. Are they expanding into new markets and introducing new products? Has their growth slowed in recent years? Knowing the answers to these questions can increase your chances of scoring a winning stock.

Macro Forces

Macroeconomic forces play a huge role in a stock’s performance. Paying attention to overall market conditions can help you make money in any market.

A good example is a recession. During a recession consumer discretionary spending goes down and credit tightens. This tends to favor companies that provide products that people need no matter the conditions. Energy companies, and food and consumer staples do well as an example. Recessions also tend to favor larger more established companies who have the capital to weather an economic downturn.

Understanding these macro forces and how different sectors of the economy fair during different conditions can help you make intelligent stock picking choices.

Personal Investing Goals

What type of investor are you? Do you have an appetite for risk or are you more conservative? Are you investing for the long-term, or are you looking to be a trader and hold positions for a short time? Knowing what type of investor, you are and knowing what your strategy of investing is can help you make better investment choices.

Investing in options and holding stocks for less than a month is a much different approach to buying a stock that you intend to keep for years or decades. Are you looking for growth or income? One will cause you to research smaller startup companies while the latter will cause you to look for steady dividend payers.

Conclusion

Doing due diligence when buying a stock can be the difference between making money and losing it. There are endless factors to investigate all the way from macro forces down to the technical analysis of a stock itself. Understanding a company and your personal investing style are all keys to success. Once you understand some of these factors you will be able to make more intelligent investing decisions.

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