Accountancy Resources
One of the fundamental steps to investing success is understanding that you are buying a business, not a stock. Although the stock is what you pay for it merely represents an ownership interest in the company you are buying.
If this sounds overly simple, think again. Unfortunately, there are a significant number of people who jump into the stock market believing they can outguess sophisticated professional traders with tools that give them an insurmountable advantage.
Buying stocks is a proven way to meet your long-term financial goals. This is another in a series of articles about how you can become a more successful investor.
Reaching long-term financial goals means investing in great companies and holding their stock as it appreciates over time and, in some cases, pays dividends along the way. So, how do you identify great companies?
Great companies build wealth for their stockholders. To do that, great companies must be consistent generators of earnings and growth that increase their value, which will be reflected in the stock’s price.
Identifying great companies that you want to own requires some homework on your part. Most of your research will be a fundamental analysis of the company’s financial health and future growth prospects.
While the stock price may jump up and down during daily trading, it is the company’s fundamental financial health that has the greatest long-term effect on its stock price.
Great companies are not always on the front page of financial news. If the market and investors are excited about one particular stock sector, such as tech stocks, other companies that may have great financial fundamentals may be trading at prices that are close to or below their intrinsic value.
Your job is to discover these great companies and identify the ones that have a long-term chance for success. Obviously, there is no way to guarantee a company will continue to grow and remain profitable.
However, using the tools of fundamental analysis, it is possible to identify those companies with the greatest chance for long-term success. Thanks to many top-quality Internet sites everything you need to know about a company is available online.
You can use stock screens to narrow down the range of possibilities so you can focus on just a few of the best candidates. These screens will help you find companies that have consistent earnings records.
In addition, you can read the thoughts of professional investors who also follow many of the great companies. However, you should not take their word at face value about the quality of an individual company.
When you buy a company, it is important that you have spent some time reviewing its financials and gaining an understanding of what the company does. You need to know what markets and products are important to the company, who their top competitors are and how changes in the economy may affect their profitability.
All of this information is readily available but will require some effort on your part. If you are not comfortable with math, don’t worry. All of the really difficult math has already been done. It is important that you understand the numbers behind the financials and which ones are the most important to this company.
Great companies don’t always remain great. You are buying great companies for the long-term however that doesn’t mean you buy them and forget them. It is important to stay on top of changes in the company’s financials and be aware of how economic changes may affect the company.
I would suggest you look at the company’s financials every quarter to see if there are significant changes in items such as earnings, revenue, debt, and any other indicators you believe are important. Since this information is readily available your quarterly check should not take very long.
Once a year, do a more thorough analysis of the company’s financial condition and assure yourself that this is still a great company you want to own. If problems are developing, hopefully, you will see them during your quarterly reviews. You should have a plan that tells you when the financials change by a certain amount you will sell.
In future articles, I will cover more steps to successful investing.
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