6 Questions Every Investor Should Ask Before Investing In A Company
A lot of investors out there buy stocks just because they are in the news or 'current hot favorites' without understanding the nature of their business. Some prime examples of such companies include Adani Green, Ruchi Soya, AMC, etc, and later these investors panic when they see the stock prices of such companies tumbling down which results in impulsively selling these stocks, and unfortunately, most of the time in losses.
When you are investing in stocks of a company, it basically means that you are buying part of the ownership of that company. Therefore it is very important to understand few important things about the company before you start investing your hard-earned money into it.
Here are six questions, we believe every investor should ask before investing in a company.
1# What are the company's core products and services?
By understanding a company's core products and services, one can get to know whether there is a regular demand for its products or services and whether the demand is likely to exist or cease in the future. Some companies have simple products which are easy to understand, like soaps, toothpaste, and detergents. On the other side, there are companies that work on sophisticated technologies like artificial intelligence. For a novice investor, it is challenging to anticipate the future demand for products of such companies as the business model is very complicated.
Can you guess what's common among Coca-Cola, Bosch, MRF, Google, Apple, and Amazon? All these are strong brands with products that have a loyal and humongous customer base. Such companies are not only likely to get repeat business from existing customers but also new business from new customers based on recommendations of existing customers.
2# Is the company's business model scalable over time?
Always remember, scalability is the ultimate game for a company. A company operating in an industry with tremendous growth potential offers a huge investment opportunity. The growth potential, coupled with the scalability of operations and sustainability of the company, can take its share prices to great heights.
3# What is the company's market share and what does the competition look like?
Any company with a significant market share or operating in a sector with colossal entry barriers enjoys an advantage over new entrants. For example, the telecom sector is a sector where high initial setup costs are a significant deterrent for new businesses who wish to enter the industry.
4# Are the earnings of the company consistent and recurring?
Any company with consistent and recurring earnings has a definite advantage. Many businesses are dependent on bagging new contracts for revenue. As business cycles change, there may be some slack periods when new deals may be difficult to come. This can affect the income of companies severely. However, companies with a recurring revenue stream won't be affected much.
5# What are the debt levels of the company?
Debt-free companies have adequate cash which they can use for expansion of business or rewarding the shareholders with dividends. Whereas debt-laden companies are forced to use part of their profits for paying off interest, thus compromising on capital expenditure for buying, maintaining, or improving their capacity utilization.
6# Does the company have visionary and transparent management?
A management that is visionary, transparent, and follows ethical business practices can catapult the business to the next level, thus making it a multi-bagger stock. On the other hand, inefficient and unethical management that is not transparent can ruin an established business. MRF, Wipro, and Maruti are among the well-managed companies that have created fortunes for their investors.
In order to become a successful investor, knowing these things about the business in which you are investing is very important.
Always remember, when you are investing in the stocks of a company, you are investing in the growth and potential of the company. So investing in companies requires research and the determination to stay calm when the stock price falls. Needless to say, stay calm only if the fundamentals of the company are intact.
If you are someone who is very new and don't know anything about investing, you can start here.
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