Beginner’s Guide to Investing in the Stock Market: What to Consider When Investing in Stock

Nobody enters into the stock market to make a loss. They enter the stock market to gain an active income stream and build investments to create wealth for the long-term. Stock markets, be it the ASX or any other global markets are ruthless places to do business. There are many things to consider before investing to avoid losing the hard-earned money you invest. Here are my top 6 things to consider before investing in ASX stock.

The company’s industry sector and its application within the industry.

It’s not uncommon to see businesses from your day-to-day life listed on the ASX. For example, the banks you transact with, the grocery store you buy supplies from or the technological companies that make your mobile phone or laptop. It’s easy to tell whether these companies are doing well simply by taking a look around on your next visit. Are there a large number of customers? Do they have good marketing strategies? Do they provide quality goods and services? If so, it’s likely that they are making a high number of sales and are sitting pretty on the ASX.

The business group the company belongs to.

While many investors don’t think much on this when making an investment, it is actually one of the most important things to consider before investing. For instance, Wesfarmers is the largest conglomerate listed on the ASX and remains home to many subsidiaries which have performed well over the years. If there is a company listed with Wesfarmers as its parent, there is a very strong chance that it is going to have good future prospects on the back of support from its parent company, strong market support and improved corporate governance.

Past performance, and current valuations.

Past performance of companies, the reported earnings and the financial ratios compared to competitors/industrial averages tend to provide an idea of how a company is performing. Referring to this fundamental information and staying updated with the company’s current situation is an important factor, and one that investors should always remain aware of.

It has been noted that the performance of a company usually reflects on the stock prices as time goes by. Further, when selecting stocks from a particular industry, a factor that can be considered is the market valuation of the stock. For market valuation, analyst’s reports are available on many platforms. Upon finding the market-value of stock, investors can check whether the stock remains under-valued or over-valued, and make their investment accordingly.

Payout structures.

Dividend payouts are considered a form of income for investors. Dividends are seen as a token of appreciation, the company sharing its earnings with investors. This keeps the interest of investors high as it’s an extra form of passive income for them. Companies that pay out stock bonuses in the form of dividends are very popular amongst investors because these companies hold cash. Paying out stock means an increased future cashflow in the form of dividends when the company announces one.

One thing to keep in mind is that different investors have different mindsets in relation to dividend pay outs. For example, if there is a company that pays out the entirety of its earnings this could be a sign that the company does not have any future plans to invest into and is usually considered a bad sign for investors.

Future prospects.

Knowing the future plans of a company is key knowledge for investors. The direction in which a company is headed, its future plans for possible expansion and the outlook that the directors of the company take towards future prospects in the annual company report should remain of utmost importance to investors when deciding upon a company to invest in. Companies with high-end growth backed by future prospects may be emerging front-runners on the ASX.

Transparency and communication.

How well a company communicates with its investors and its transparency over past years is something that should be considered before selecting a stock for investment. Companies that comply with standards relating to communicating with shareholders, through corporate briefings, explanatory notes through the annual reports and the letters sent out for shareholders through the stock exchange are generally considered good companies to invest with.

So, to recap, when looking to invest in a company, research whether they have the following:

  • Strong management
  • A good group
  • Strong past performance
  • An ideal payout strategy
  • Strong prospects
  • Transparency and a good communication structure

If you’ve been successful in investing in the ASX, please feel free to share your tips in the comments. We love hearing about success stories and inspiring others to aim high and invest the right way.

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