What do we need to know before buying a stock? - Seedly

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Asked by Anonymous

Asked on 02 Mar 2019

What do we need to know before buying a stock?

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Yeo Enk Loui
Yeo Enk Loui
Level 6. Master
Answered on 07 Mar 2019

Hi there!

Just want to mention that perhaps you may also want to adopt a more macro-view and look at which stage of the business cycle the economy is at. Some stocks tend to perform relative to others at various stages of the business cycle.

For example: you may want to consider buying stocks belonging to the cyclical industries, where they have above-average sensitivity to the state of the economy. Examples include: consumer durables and capital goods when there is an expansion in the business cycle.

Conversely, you may want to consider buying stocks belonging to defensive industries, where they have little sensitivity to the business cycle and are not as heavily as affected as those stocks belonging to the cyclical industries during times of contraction/recession/downturn. Examples include: consumer staples, pharmaceuticals and public utilities.

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Zann Chua
Zann Chua
Level 6. Master
Answered on 04 Mar 2019

Hello!

These are some of the things that i will use to see whether to buy a stock.

1) It is important to know what exactly the company does, how they generate revenue etc, essentially knowing the company's business model.

2) It is also important to know the P/E ratio.

3) I would also usually look at the dividends of the company, i would choose to invest in stocks with a high dividend.

4) I would also look at the company's financial statement to get a better idea of the company's current financial health so as to establish whether im confident enough to park my money in the company.

Hope this helps!

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Alvin Chow
Alvin Chow
Level 2. Rookie
Answered on 07 Mar 2019

I take a more quantitative approach towards investing and the very first thing to do is to find an edge in the markets. For example, I don't use ROE or ROIC metrics because studies have shown that the performance becomes worse.

And i stick to proven Factors like P/B ratio to determine Value stocks.

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Dawn Fiona
Dawn Fiona
Level 5. Genius
Answered on 03 Mar 2019

#1: Do you understand what the business model is, and how they make money? What kind of people are running the business, and can they be trusted? Do they allocate capital efficiently?

#2: Have you validated this against their financial statements? What is their financial standing? Look at metrics like current ratio (their ability to pay their short term debt obligations), operating cashflow (are they making or losing money?), etc. Different industries = different metrics, which is why you must first understand #1

#3: What are their current valuations? Are they overpriced or undervalued? Some useful metrics could be price-to-earnings ratio, price-to-book ratio, net-net valuation (which Alvin taught during the festival), discounted cashflow, etc. There are a number of valuation strategies to look at.

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Sandra Teo
Sandra Teo
Level 6. Master
Answered on 02 Mar 2019

Hi there! Here is an investment checklist I use before buying a stock!

  1. ROE (Return on equity). The higher the ROE, the more efficient the company is at using cash to generate profit. You can use the ROE to compare the profitability of the company to other companies in the same industry.
  2. ROA (Return on assets). Similarly, you can compare the ROA of a company to other firms in the same industry. The higher the ROA, the more efficient the company is using its total asset to generate profits.
  3. Debt to Equity Ratio. This ratio indicates whether the company can generate enough cash to satisfy its debt obligations. Depending on the industry and company size, the acceptable D/E ratio changes. For most small/ medium companies, a D/E ratio of 1.5-2 is acceptable.
  4. ROCE (Return on Capital Employed). This number indicates the performance of the company. Steady rise in ROCE numbers indicates a strengthening long-term profitability.

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