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6 Considerations Before Buying Stocks for Investment Shares

Artikel diperbarui pada 13 Maret 2023.

There are many things to consider before buying stocks. You need to pay close attention to these aspects so that you can strategically set your profit expectations.

In fact, stocks are considered essential for those who want to save for retirement or achieve other long-term financial goals. This is what affects the appropriateness of a stock for you to invest in.

Things to Consider Before Buying Stock Shares

Before buying stocks, you may have envisioned the splash of profits that will come into your account. But, of course, that will only happen if you buy stocks with careful calculation and consideration.

1. Price

It’s important to note that price should only be viewed in a specific context. Many companies will “split” shares once they reach a certain level, thus lowering the price but increasing the number of shares available.

Other companies never split, so a single share can be worth several hundred dollars or more. But the price, especially when matched with historical prices, will determine how many shares you can buy with the money you have.

When you are evaluating stocks, knowing the stock price and its history will help in determining your valuation. It is an important pre-purchase consideration that can guide your decision.

2. Revenue Growth

Stock prices generally only go up if the company is growing. And one of the few ways a company can grow is by increasing its revenue.

Revenue is often referred to as the “top line”, and is a key indicator of a company’s success. It is important to look at this aspect as one of the considerations before buying a stock.

Look at the increase or decrease in revenue from one quarter to the next and one year ahead. A positive trend line bodes well for the stock price, but if revenue is flat or declining, it is important to know why before investing.

3. Earnings per Share

How much money does the company have left at the end of each quarter? Take that number, divide it by the number of shares that have been sold, and you get earnings per share (EPS).

For example, if a company made $40 million in profit last year and had 24 million shares, then its EPS would be $1.66. EPS can be a driver of stock prices, as investors generally don’t want to overpay for a stock.

Generally, the higher the EPS, the better shape the company is in. But there is often debate about the best range for EPS, and companies can manipulate it by buying back shares, thus increasing EPS without actually increasing profits.

4. Dividends

Many companies will return a portion of their earnings to shareholders. Investors can get a small payment for each share they own, known as a dividend.

Many stable companies will issue a nice dividend every quarter. The income from this line may exceed the interest you would get from a regular bank account.

As such, dividend stocks are popular among investors looking for additional income, as well as stock growth. It’s an important consideration before buying stocks that you need to look at carefully.

It’s easy to find companies with the highest dividends, and you can also look up the dividend yield, which is the dividend divided by the share price. If a company maintains or increases its dividend, it’s a sign of strong footing.

It’s worth noting that many good companies don’t pay dividends because they prefer to invest the money back into the business. Some companies offering dividends could be because they can’t offer huge share value growth.

5. Market Capitalization

If you want to invest in stocks that will give you steady growth without much volatility, large companies are often a consideration before buying the best stocks.

A company’s market capitalization is basically the value of all its shares. Companies with large market capitalizations are often large and diversified enough to avoid being affected by a single piece of bad news.

Big names also, inevitably, influence an investor’s pre-purchase stock considerations. More popular companies usually do have large market capitalizations, but that doesn’t mean there’s no potential for newcomers to be “pushed aside”.

6. Historical Price

All companies have and probably will experience difficult times. But if you’re investing for the long term, you need to do more than just look at one company’s earnings report or current price performance.

Looking at five-year, 10-year, and even 15-year returns will give you an idea of whether a company can survive difficult phases. Historical returns are no guarantee of future performance, but they can at least be illustrative.

Of these six aspects that have been outlined, it is important to dive into more detail on each of them. This is so that you can be more mature in making considerations before buying stocks.