When you invest in the stocks of a company, you gain ownership of a part of the company. So it is important to invest in a profitable firm whose shares will grow and give you good returns in time. As different industries have different growth rates and profitability, stocks in companies from different industries will bring varied degrees of risk and returns for you.
This is because the value of a company depends on how relevant its product or service is in the market at a given point in time. For this reason, it becomes crucial to analyze which industries and specific companies are profitable and whether investing in them could be beneficial in the long run. Here are two useful tips on investing in the stock market.
Assess Company Earnings Before You Invest
While a company’s immediate stock price is largely determined by speculations, the long term growth in the stock price is determined by the company’s earnings. It is always better to invest in a company that not only is well established but continues to show growth. The stock of a company with a strong business will continue to grow even if the markets drop, while the stock of a company with a shaky business model will continue to fall even when the markets are stable or rising.
However, it is important to know that even companies with currently good earnings may not be able to sustain their market position in future. Before investing in a company’s stocks, ensure that you assess how the company’s earnings, revenue and cash flow is likely to change in the next few years.
Don’t Switch Stocks Too Frequently
If you have a strong stock in your portfolio, bought at a low price, it is best to hold on to it instead of trading it for a small profit. There are two reasons for this – firstly, the stock could have the potential to go much higher. So if you trade in the profits for another stock, you may lose out on the earnings this stock can bring over the next few months or years.
Secondly, the cost of trading stocks is not negligible. Every time you switch from one stock to another, you have to bear brokerage costs as well as capital gains tax. So unless you are sure that the stock has reached its potential or that there is a better opportunity in the market, don’t hastily look for a new investment.