Investing in stocks is one of the best ways to build wealth over a long period of time. When you own a share of stock, you own a piece of a public company. When these businesses do well, investors get paid. People who want to save for retirement or reach other long-term financial goals need to have stocks.
Mutual funds and exchange-traded funds are two ways to put your money into groups of stocks. But you might also want to think about buying shares in different companies. There are more than 4,000 companies that trade on the two biggest stock exchanges in the United States.
But how do you know if you should buy stock? Why are some stocks good and others bad? Here are five things you should think about.
The price of a stock is the first and most obvious thing to look at. How much will a share of this company cost? Now, it’s important to keep in mind that prices should only be looked at in the bigger picture. Once shares reach a certain level, many companies “split” them, which lowers the price but makes more shares available.
Other companies never split, so a single share could be worth several hundred dollars or more. But the price, and especially how it compares to prices in the past, will tell you how many shares you can buy with the money you have.
When you look at stocks, knowing their prices and how they’ve changed over time will help you figure out if you’re getting a good deal.
The only timeshare prices that go up are when a company is growing. And one of the few ways for a business to grow is to make more money. Revenue is often called the “top line,” and it’s one of the best ways to tell if a business has been successful.
It’s important not to just look at income by itself. Instead, you should look at how much your income goes up or down from one quarter to the next and from one year to the next. A positive trendline is a good sign for the stock price, but if revenue is flat or going down, you should find out why before you invest.
Earnings Per Share
At the end of each quarter, how much money does the company still have? Divide that number by the number of shares sold to get the earnings per share, or EPS, number. For example, a company with 24 million shares and $40 million in profits last year has an EPS of $1.66.
EPS can affect stock prices because investors don’t want to pay too much for a stock. In general, the better a company is, the higher its EPS. But there is often disagreement about the best range for EPS, and companies can change it by buying back shares, which raises EPS without actually increasing profits.
Dividend and Dividend Yield
A lot of companies will give some of their profits back to their shareholders. A dividend is a small payment made to investors for each share they own.
Many healthy companies pay out good dividends every three months, and the money you get from these dividends may be more than the interest you get from a normal bank account. So, dividend stocks are popular among investors who want to make more money and grow their shares at the same time.
It’s easy to look for companies with the highest dividends, and you can also look for dividend yield, which is the dividend divided by the share price. If a company has kept or increased its dividend, that means it’s doing well. When dividends are cut, it’s usually a bad sign.
Some of the best-known public companies have been called “Dividend Aristocrats” because they have paid dividends and raised them for at least 25 years in a row.
It’s important to remember that many good companies don’t pay dividends because they’d rather put the money back into the business. (Amazon is a well-known example of this.) And many companies, like utilities, pay dividends because they can’t offer much share value growth.
The size of the market
Bigger isn’t always better, but if you want a stock that will grow steadily without a lot of ups and downs, the biggest companies are often your best bet. The market capitalization of a company is basically the value of all its shares. Companies with big market caps are often big enough and have enough different types of businesses that they won’t be hurt by one bad piece of news.
Every business has its ups and downs. But if you want to invest for the long term, you need to do more than look at a single company’s earnings report or its current price performance.
When you look at a company’s five-, ten-, or even fifteen-year returns, you can tell if it can make it through rough times. Historical returns are not a guarantee of how well an investment will do in the future, but they can at least be used as a guide.
Research analysts work for a lot of brokerages and investment banks. They write reports and make suggestions about different stocks. Most of the time, these reports have “buy” or “sell” ratings based on what the analysts think about the share price and finances of a company. Analysts don’t always agree, so it’s best not to rely on just one report when deciding whether or not to invest.
Most of the time, it’s important to look at not only stock but also the industry in which the company works. By doing this, you might be able to tell if a certain type of business or market is doing well or not.
For example, if you’re judging a company like McDonald’s, you should look at the whole fast food and restaurant industry to see how Americans eat out. When you look at a stock in this way, you can figure out if there are positive or negative factors that may not show up right away in the share price or balance sheet.
No matter how hard a business tries, it can’t control everything that could affect it. The health of a company and how its shares can be affected a lot by the economy of the country and the world as a whole.
Things like consumer prices, the unemployment rate, and changes in interest rates can have an effect on a company’s performance that has nothing to do with the company itself. Even though the stock market and the economy are two different things, they have a lot in common.
Most of the time, when the economy is doing well, so are companies, and this leads to sharing growth. In the same way, share prices can lag behind when the economy is slow or when the economy is uncertain.