When in doubt dont buy a stock
I have been out for quite some time… so here am I again…
At times one may be hesitant and then let the day pass then we learn that the stock we are planning to buy just drop further or if worst bad things happen and the company started to go from one problem to another.
Back then the SEC(Securities and Exchange Commission) made an ad on all TV stations regarding the part of the public to know more about the companies that one may invest into. The message was” Invest: Investigate”. That time a lot of Pre-need and insurance companies are closing one after the other and one has been all around the news for the alleged embezzlement of the officers of the company.
So I guess you are thinking then we shouldn’t invest in companies anymore because they might close down run away with our money. The thing is as an investor one should always do what we call due diligence. What is “due diligence” then?
A legally binding process during which a potential buyer evaluates the assets and liabilities of a company.
1. An investigation or audit of a potential investment. Due diligence serves to confirm all material facts in regards to a sale.
2. Generally, due diligence refers to the care a reasonable person should take before entering into an agreement or a transaction with another party.
In a due diligence this is where audit and Fundamental analysis comes. But such is too hard to do so for ordinary investors like us we should always check their Financial statements that is filed to the SEC.
At least we can check how is the standing of the company.
Is it Liquid(by means of the Current Ratio or Working Capital Ratio which should be at less 1:1)?
How big its Liability in relation to Shareholder’s Equity(by means of Debt to Equity Ratio that shows if such company is debt strapped that is the likelihood of control is to creditors)?
Is it Profitable(by means of the Profit and Loss Statement), Is it growing(by comparing This year from last year which is commonly known as Fluctuation Analysis) .
Again that is why when picking stock to invest into one should make a background check on the company. Some stocks have not so good fundamentals and performance and thus they end up into what they call speculative stocks. Investors and players speculate that a good news about the company will make a short uptrend thus players buy it at a lower price and sell it once the price goes 2-5% up. They use volume to profit from such. But as an investor in which one looks at the long term benefits of an investment one should always do what we term “home work”.
Again a reminder to do due diligence, invest in fundamentally sound company, invest only free cash, and trade at your own risk.