10 Questions to Ask Before You Buy a Stock
1. What Does the Company Do?
Warren Buffett famously says he doesn't invest in what he doesn't understand. If the greatest investor of the past 60 years is brave enough to acknowledge that he doesn't understand all companies, we should all probably take heed. This first basic question is a simple one, but that doesn't mean it's easy. To answer the question, there are plenty of places to look, including the company's Web site.
2. Is the Company Profitable?
This is also a simple question, which can be made more complicated by all sorts of variations on a company's earnings. Investors can read the quarterly and annual earnings reports to check out how much net income the company reported, in rupees
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Who Runs the Company?
Unlike professional money managers, individual investors don't have the ability to drop by a company's headquarters and chat up the management before making an investment decision. However, that doesn't mean there aren't plenty of ways to find out about the leadership. Any company worth its salt will have a Web site that lists the senior managers, how long they have been with the company, their background and the company's history.
7. How Clean Is the Company's Balance Sheet?
Serious-minded long-term investors need to be able to read over a company's balance sheet. Is the company saddled with a huge amount of debt compared with how much it earns? Checking out a company's earnings alone doesn't tell you if the company has borrowed to the moon to achieve those earnings. It's also useful to see how much the company is spending on research and development and how large its inventory levels are. (If they are growing from last year, that may mean business is slowing down.) This brings us to question No. 8.
8. Have You Read the Company's Annual Reports?
The annual report every company is required to file. It's much more in-depth than the more sanguine annual reports that companies file during earnings