3 Tips to Consider before Investing in a Stock.

Buying shares and investing in the stock market is a slow way to build up wealth. It is steady too, it may take time to appreciate and for you to reap dividends. One good thing about shares is you can keep reinvesting your dividends to grow your net worth, that’s what Warren Buffet does.

Agreed, it’s a great way to make some investments for the future but you don’t want to do that unguided, the stock market always may seem easy to invest in, but it’s risky without the right knowledge. You don’t want to buy a share at $30 dollars and come back months later to find out it has crashed and there isn’t any hope of it rising again.

Warren Buffet invests in companies that pay dividends and are consistently growing, what should you look out for before you invest? The company should inspire confidence in you both for now and the future.

Let’s look at these few tips:

  1. Check the strength of the Industry

Investing in oil a couple of years back may have been a great decision for the period of the oil boom. But with the advent of other forms of energy, many countries are shifting focus from oil into others. And the price of oil in the global market has plummeted. So also, the shares.

To ascertain how strong an industry is means digging deep into the history and growth pattern of it.

Now here’s a quick question to help you think it through, using the oil and gas industry as an example. How many alternatives can the world get if they decide to minimize their usage of oil and gas? You’d find out there are a couple of great alternatives like solar, biodegradable energy and lots more.

What of the Soda production industry? People are going for healthier alternatives because of the spike in nutrition related diseases. There are also a lot of questions you need to look into to help you determine how strong and healthy an industry is.

  1. What is the debt profile?

Some companies post profitable stocks, and shareholders dividends always looks good, but there is more to check. The debt to equity ratio should not be too high.

Here’s why, even if the company pays great dividends, one day it is going to pay off the debts and it will come from the profits. So instead of dividends increasing, it will reduce at some point in time. The ideal stock to buy is that which the debt to equity ratio is not more than 1.00.

  1. Check for Consistent growth

You need to check how great a company‚Äôs growth is. That means you should keep an eye on the cash flow. If it isn’t positive, take a break.

Positive cash flow means a company’s assets are increasing, it’s having turnover and can pay its expenses. So, look out for growth and cash flow.

The hot stocks to buy right now are those with a strong industry, low debt and a consistent growth and earning rate. The growth and earning rate should be from 5 – 15% in about 5 years. It could be more, but more is not advisable

And when you find all these factors right in an intended investment, reinvest your dividends when it comes, and continue reinvesting it.

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