There is more than one important thing to consider when planning to buy a stock. One of the most important factors to consider is whether a stock is too risky. An investor should also review a company's income statement to get a sense of where net income and revenues have been trending in recent quarters. Past stock performance is another key element when considering an investment.
Before investing in a stock, it is helpful to examine the financial health of the company. Companies that are not yet profitable pose greater risk to investors because there is no assurance the business will make money. Profits, which are reported as earnings, are important drivers of a company's stock price. An income statement reveals how much money a company earned in sales, or revenues, as well as expenses over a period. The difference between revenues and expenses is the net income, or profits.
According to a March 2008 article in "USA Today," a stock's risk can be assessed by determining whether or not an investment's potential profits are worthwhile. To examine risk, an investor might determine the standard deviation, or volatility, that is reasonable. A stock that often demonstrates dramatic price movements either upwards or downwards is volatile, and can be considered a risky bet. A less volatile stock is likely to deliver modest but steady price movements, and may prove to be a less risky investment.
Size is an important factor to consider when planning to buy a stock. Stocks can be grouped according to their market capitalization, which could range from large to small. Market capitalization is a reflection of a company's size based on the number of outstanding shares and the stock's market price. When selecting an investment, it may also help to compare a stock's performance with companies of a similar size and that trade in the same industry and have comparable business models.
Investment guru Warren Buffett began investing at a young age before becoming extremely wealthy. His investment strategy is to seek out companies that he believes in and understands, according to a March 2010 article in the "Daily News." This means he often bypasses the stocks behind new and emerging technologies for more traditional and slower growing investments in such sectors as consumer products, home furnishings and jewelry. Mr. Buffett is also careful to select companies with financial statements that are easy to understand.
- Morningstar: The Income Statement?
- "USA Today"; Standard Deviation Is One Way To Measure Risk; Matt Krantz; March 2008
- "USA Today"; Is Warren Buffett's Berkshire Hathaway Stock A Buy?; Matt Krantz; June 2011
- CNN Money: Investing In Stocks: Top Things To Know;
- "Daily News"; For Those Seeking Wealth, Follow Warren Buffett's Lead; Peter Siris; March 2010