Factors for Buying Stock
The methodology to follow when analyzing investment opportunities to incorporate shares in our portfolio will mark the evolution of this. Although not for that, the fluctuations of the market can affect the valuation and daily profitability, but if we follow a few simple steps we can minimize the risk and reach our investment objectives.
Keys Factors to Consider When Buying Stock
- Time
- Security Shield
- Potential
- Consistency
- Analysis
- Diversification
- Time
Within the investment universe in which we have a certain number of shares (for example any stock index: Ibex 35, Eurostoxx 50, Nasdaq 100, IPC) or for example by Sectors within this investment universe, we will have a series of actions that we should put a note based on our temporary investment preferences.
If our objectives are to maintain the action in a certain time horizon, then we will put a note (for example from 1 to 5), with 5 being the maximum score that we will give to each of the actions that have expected performance during that time horizon In accordance with our objectives.
The expected performance can be measured with historical series (remember that we must get them from daily prices and then obtain the percentage change), can also be measured by dividend yield. At this point, we must study and analyze the economic context where the company is located, there are sectors (for example, banking in Europe) where the Bank in question may pay a good dividend but greater capital requirements are foreseen and it is possible Which in the future cannot continue to support this investor base because they have to reduce the dividend.
- Security Shield
Within this point, we highlight the combination of financial strength and volatility (risk). Depending on the type of investor and our ability to withstand market fluctuations, we will choose stocks with certain volatility.
To do this, we will follow the same procedure as in the Time, but in this case we will give a note of 1 to the actions with greater risk (unfavorable for our investment profile) and a 5 to the actions more favorable to our profile, and complying with our objectives.
It should be noted that our objectives (which may vary for each investor) are one of the most important aspects when choosing an action. In this case, imagine that we want to invest with a year of time horizon to pay for our son’s studies, or buy a certain item, and we have chosen an action with a lot of volatility, then the time may be that we are losing money for a certain Movement of the market, and therefore that we have not fulfilled our objectives.
As a recommendation, regardless of the investor profile (even the most aggressive), all actions with a score of 4 or 5, we should not incorporate them into our portfolio for safety.
- Potential
At this point, it is important to compare the potential of the company with a certain time horizon with the benchmark (choosing the benchmark correctly, if we are valuing a stock that is listed on the New York Stock Exchange, we will not be able to choose the Eurostoxx benchmark, otherwise The S & P 500). To do this, we must make an average of the highest value and the lowest of the time horizon of both the company and the benchmark.
- Consistency
To do this, we will analyze the annual ratios that show information on changes in income, net profit , cash flows in recent years and also projections of future years (usually between three and five years). By analyzing the financial statements, we will know how it has grown in recent years and whether growth estimates are good.
At this point, we will know the consistency of the results, or if they have a great variation in time.
To establish if the growth of a company is strong, it should normally show growth of at least 10% per year, and then we should think about buying this stock. On the other hand, if the growth ratio has also been consistent without large variations, it will be one more reason to buy the stock and incorporate it into our portfolio, even though the ratio does not exceed 10%.
- Analysis
It is important before buying an action, to know the situation of the sector. For this we must not forget that there are many analysts who provide the market analysis reports that help us put in situation, commenting on the most important factors affecting a particular industry, events that can negatively and positively affect the value of the action Profit or profit projection of the industry.
- Diversification
This point will be important if we have more than one share in our portfolio. The theory recommends having a minimum of 5 shares with a low correlation (less than 0.5) for diversification to take effect and all of the shares in our portfolio have a lower risk than the risk that each have separately.
To do this we must avoid buying shares of the same sectors or industries, following the example of the bank we should not have in our portfolio shares of two banks.
Hello everyone! This is Richard Daniels, a full-time passionate researcher & blogger. He holds a Ph.D. degree in Economics. He loves to write about economics, e-commerce, and business-related topics for students to assist them in their studies. That's the sole purpose of Business Study Notes.
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