In order to become a smart investor, there are certain things about stocks that you must become familiar with. Thorough investigation of the product or commodity is critical, because the more you know about the stock you want to buy, the better your chances are on receiving a high return on your investment. Here are some baseline questions that will provide the answers about each stock you consider purchasing.
What is the source of the company's cash flow?
To answer this question properly, it is important to be as specific as possible about the company you wish to buy stock from. Avoid making assumptions that can create a false picture of what the company's cash flow really is; it is critical to have the correct information because it's the only way to know which stock is best to invest in. For example, Toshiba Corporation sells laptops in various discount stores throughout the United States. Initially, one would assume that this is the company's main cash flow. However, through further investigation, it is discovered that Toshiba has a global 'pay for support' service that is their main source of cash flow. An investor would gain a much higher return on investment if he purchases stock in the 'pay for support' area of Toshiba Corporation.
How much cash is generated by the company, and when?
Once you have determined the source of the highest cash flow for the company you have chosen to invest in, you need to estimate the total amount of cash made, as well as when the cash flow takes place. For example, you estimate that Toshiba Corporation makes $30,000 per day during the month of December. As time goes on, that $30,000 grows each December due to inflation. You conclude that the best time to sell your stocks for a high return would be in the month of December, sometime in the future.
How much money does the company require to function?
Some businesses require more capital in order to generate profits. As a rule, the less capital it takes to operate a business, the more attractive it will be to an investor. Companies with good profit margins are more attractive to business people, which means those companies have more marketability in the economy. That in turn creates a higher return rate on the stock purchased.
Does the management of a company have a friendly shareholder orientation?
It is a given fact that how a company treats its shareholders determines its success in the stock market. Satisfied, happy shareholders will buy more stocks and refer other people to buy stock for the company. Keeping shareholders informed on the status of the return rate on their stock is a good way for management to ensure friendly relations with them, thereby increasing shareholders' purchasing power and thus making more money.
Are the actions of the management of a certain company consistent with what they say in public?
Simply stated, the more honest that management is within any company, the more investors they will attract and retain. For example, creating false rate return reports on company stock in order to increase sales and make money would seriously strain relations between the company and its shareholders. The investors would more than likely sell their stocks rather than stay with a company that was dishonest. It is crucial for companies that sell stock to be honest at all times with their shareholders.
If you can answer the above questions to your satisfaction, with information you obtained while investigating a prospective company, then your chances of creating a return on your investment has greatly increased if you buy stock from that company.
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