5 Questions You Must Ask About The Company You Are Investing

5 Questions You Must Ask About The Company You Are Investing
by Nutan Gupta 10/06/2017

It is not a tough task to invest your money into a company, but what is tough is to invest successfully. It is not possible that all the investors who enter the share market with the motive to earn money will be able to make money they dream of. It is estimated that 80% of the investors in the market do not make any profit but end up losing their money. The reason why a majority of the people loses their money in stocks is that they go with the sentiments and follow the herd. If proper research and analysis back your investments, then it is very rare that you suffer any significant losses. Key to success in share market is never to face major losses because it wipes out your capital which you planned to earn money from.

Here we bring you five things to watch in a company you plan to invest your hard earned money into:

Questions About The Company Before You Invest

1) What do they do?

It is crucial to know in which field / sector the company operates thoroughly. What do they manufacture or what services do they provide? What are their existing and future / planned products? What are the growth prospects? What position do they hold in the market? It will be of great advantage if you have some amount of knowledge about reading the income statement and balance sheet of the company.

2) What is the size of the company?

Market capitalization defines any company listed on the stock exchange. Companies with market capitalization of Rs. 10,000 crore or more are called large-cap stocks. The ones with market capitalization between Rs. 2,000 crore to Rs. 10,000 crore are called mid-cap stocks and those below Rs. 2,000 Crore are known as small-cap stocks. Now you must be thinking as to why this is important then this table can give a clear picture why market cap plays such a significant role:

Parameter Large Cap Mid Cap Small Cap
Risk (Probability of negative returns) Low High Very High
Probability of Exceptionally High returns Low High High
Liquidity Very Good Good Low
Company Information Available Very Good Good Poor

3) What is the Price/Earnings Ratio?

Also known as PE ratio, it is the measure of how much money you need to invest to make an earning of one rupee. It can be calculated by dividing the current market price of the stock with the cumulative earnings made by the stock in the last four quarters. The lower the PE ratio is, the greater is the return for every unit of money invested.

4) What are the dividends you can get?

If you are a lazy kind of investor and have long-term investment goals, then you need to watch out for the bonus provided. The dividend is a fixed rate of return a company pays to all the equity shareholders every fiscal year irrespective of rise or fall in the stock prices. If you want to park your money into some stock, then looking for higher dividend is a good option.

5) What story do the graphs tell?

It is one of the easiest ways to find if the stock you are eyeing at has grown in the past or has gone for a rollercoaster ride in past time. All the great stock monitoring sites have charts ranging from a day to past 10 years. A company with continuous fall is a not a safe option to invest unless you have exceptional risk appetite.