Here are five things to consider when you are choosing a new company to invest in. Also, remember to stay unbiased as you consider each of these factors: emotional decisions rarely do well in the stock market.
Is the Company Buying Back Their Shares?
Look at the new company’s per-share growth when you consider investing. Do they have a policy for buying back shares to make the per-share value greater? Cutting the number of shares increases each shareholders piece of the stock pie.
Overall company growth might seem important and impressive to the amateur investor, but wise investors know that it doesn’t matter as much as share value. Be wary of companies more interested in domain building than in the profitability of being an investor with their company. You want to invest with a new company that takes care of its shareholders. Fisher Investments Founder Ken Fisher has written books to help investors understand new company growth: these books are a great resource for new investors.
What’s the Company’s Total Value?
Calculate the market capitalization of a new company by figuring out how many common shares are available multiplied by the cost per share. This number represents the cost to buy the company out (known as market capitalization). Thus, a business with 5,000 total shares at $100 per share is worth $500,000.
Knowing a company’s total value will keep you from overpaying for inflated stocks. Another handy tool is the p/e ratio, which determines the price to earning ratio of a company. By using a market cap gauge as well as a p/e ratio tool, you will make sane, smart choices in the market.
Will Your Cost Outweigh the Profits?
Here are some of the forgotten and hidden costs that could outweigh your seemingly great profits:
- Brokerage Fees: Read the fine print before you sign a contract. Some charge fees, commission, and advisory fees all separately.
- Taxes: Your taxes could be exorbitant. Check with a financial advisor to see if your gains will be worthwhile.
- Inflation: Sometimes gains over ten years seem great until you realize that inflation outpaced growth. Consider the average rate of inflation against the rate of gains.
- Brokerage Commission: Even if you don’t have to pay outright fees, every stock broker takes a commission. Try to haggle the rate down depending upon the size of your portfolio.
- Advisory Fees: Expect to pay for advice, both direct and personal as well as indirect and company-wide.
Can You Wait Five Years?
The longer you sit on an investment, the more likely it is to pay. If you need your money back in three years, then you might end up losing money in fees and commissions. Only invest in a new company if it makes sense in terms of the company’s value as well as in terms of your own needs.
When you decide to invest in a new company it should be done with confidence. This confidence comes from thorough research, patience, and endurance. Remember to stay with your stocks for the long haul, and you will find profits at the end of your rainbow.
