The 10 Questions to Ask Before Buying a Stock

By Anna Johansson via

If you’re new to the world of investing, you may experience a range of emotions when considering your next stock pick. You’ll be excited at the prospect of beating market averages, or worried about the possibility of losing your money. Whenever a piece of news or a local trend makes you consider a new stock for your portfolio, you’ll alternate between enthusiasm and apprehension, unable perhaps to make a quick decision.

There’s nothing wrong with thinking through your choices, so long as you’re doing it effectively (and avoiding analysis paralysis). The next time you find yourself toying with a new investment opportunity, there’s a series of critical, directed questions you can ask in order to act more decisively.

Questions to Ask

Before buying that alluring investment opportunity, ask the following questions:

1. Does everyone else think this is a good opportunity? You shouldn’t base your entire strategy on public opinion, but evaluating others’ thoughts on this investment is an important step in your analysis. If a stock is universally reviled, ask yourself why. If it’s universally adored, ask yourself why. Sometimes, a “sure bet” in the mind of the public is actually a bad investment; remember, prices are determined by market activity, so if everybody believes a company is an amazing investment opportunity, it could push the price artificially high.

2. How much money are you willing to lose? You should never invest more in a single stock than you’re willing to lose. If you’re confident you could lose, say, $5,000 on stock for a given company and still walk away with a strong portfolio, you can continue making conservative decisions for your future. If you’re afraid of losing the money, consider investing a smaller amount, especially if you’re inexperienced.

3. What’s the competition like? Every company has competition. If you’re only looking at a single business in a given industry, search for their contemporaries. Which other startups are doing what they do? What are their advantages and disadvantages? These questions can help you understand your investment target’s place in the world, and whether they’re truly an outlier.

4. What is the trading volume? Trading volume refers to the number of shares available in this company. The higher this number, the more stable the price may be, and the more liquid the investment is likely to be. If your investment opportunity has a suspiciously low trading volume, it may be cause for concern.

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