Through decades of experience, Warren Buffett and Bill Ackman have become two of the most respected investors in the world. Before they built strong track records investing in stocks, they had to do their homework.
Buying stocks is a proven way to generate passive income. However, it’s wise to learn as much as you can before picking a stock. Here are 5 questions you should ask before investing in a stock.
1. What does the company do?
Research the company before investing in its stock. Get a basic understanding about the company. Learn about each company’s products, services, business model and decision makers. Read the latest news about the company.
2. How much revenue does the company generate?
It isn’t uncommon for a company that loses money each year to have high performing stocks. In fact, Amazon was started in 1994 but it took nearly 7 years for it to become profitable.
Companies like Amazon succeeded because they had a clear path to profitability. Typically, these companies are exceptions to the rule. Most companies that lose millions (or billions) of dollars a year go bankrupt.
3. How strong is the company’s sector or industry?
Invest in companies that are in thriving industries. These include health, technology, infrastructure and energy. Be cautious when investing in companies that are trendy or in a shrinking market. Pay attention to each company’s growth potential.
4. What fees will you pay to buy and sell stocks?
With online platforms such as Fidelity Investments and Robinhood, it’s easy and inexpensive to trade stocks. If you hire a broker, you’ll have to pay additional fees and commissions. Calculate the fees that you’ll be required to pay beforehand.
5. Can you afford to lose money?
Contrary to what many novice investors think, the stock market is not a way to earn a fast buck. The reality is you may lose money before you realize any gains. Review the current state of your finances to determine if you can afford to lose any money that you will invest. If not, take a few months to get your finances in order and buy stocks when you’re financially ready.
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Want to learn more about investing in stocks? Explore the following resources for additional information.
- The Intelligent Investor: The Definitive Book on Value Investing by Benjamin Graham and Jason Zweig
- A Beginner’s Guide to the Stock Market by Matthew R. Kratter
- How to Make Money in Stocks by William O’Neill
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