Monday, January 07, 2013

The RIGHT Business

So how do you first pick the right stock to invest in?

You see, a lot of people treat the stock market as some sort of glorified casino - making bets on whether stock prices will rise or fall (with often disastrous results). You have to remember that when you purchase stock, you are actually purchasing a piece of a very REAL business.

If that business is profitable and grows in value over time, so will your shares. If the business is going down the drain, so will the value of your shares.

So instead of treating stocks as something you aim to buy and sell for profit, start to see stocks as a way to OWN valuable and profitable companies . Because in all manner and sense, whenever you buy a company's stock, you essentially become a part-owner of that company.

So the first thing you need to do whenever you're thinking of purchasing any stock is to LOOK at the business behind it and find out if it's going to be a good, successful business.

Here are 4 things to look out for:
  1. Invest in companies with a strong and sustainable competitive advantage. A company with poor or no competitive advantage can easily be run out of business by its competition.
  2. Invest in companies in a resilient or growing industry. A company in a sunset or competitive industry face eroding profit margins and eventual extinction.
  3. Invest in companies with strong growth potential and a clear strategy for achieving that growth. A company with sustainable, long-term growth will grow in value over time.
  4. Invest in companies you understand and within your circle of competence. If you don't understand a company's business model, how it runs its operations or earns its income, then you can't value it accurately and safely invest in it.
Remember, if the business behind your stock is steady, profitable and has good growth prospects, then the value of your stocks can only rise over time.

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