Most bad investments are not bad luck. They are companies bought on a tip, a headline or a chart, by someone who could not have explained what the business does. An hour of research, in the right order, prevents most of them.
In short
- Start with the business, not the share price.
- Read the numbers across several years, not one.
- Write down what would make you wrong before you buy.
- Ask what the price already assumes; a great company can still be a poor buy.
1. What does the company actually do?
Write it down in two sentences: what it sells, and who pays for it. If you cannot, stop here. The company’s own annual report usually explains this in its first pages, and the stock page on TruVest shows how it makes money and where it sells.
2. How does it make money, and is that growing?
- Is revenue growing, and is the growth speeding up or slowing down?
- Is it profitable, and are profits growing in step with revenue?
- Does reported profit turn into cash? Cash from operations is harder to flatter than profit.
Where to find these figures, and what to compare, is covered step by step in how to read an annual report.
3. Can it survive a bad year?
Look at how much it owes and what the debt costs to service. A company that needs to borrow or issue new shares every year to keep going is exposed the moment money becomes harder to raise. Rising share counts also mean your slice gets smaller.
4. What could go wrong?
Before buying, write down two or three things that would make you wrong: a competitor taking share, a key customer leaving, a product losing its edge. Then decide what you would do if one happens. This is the most skipped step and the most useful one, because it turns a future panic into a plan.
If you cannot say what would make you sell, you do not yet know why you are buying.
5. What does the price already assume?
A wonderful company bought at a price that already assumes years of perfect growth can still disappoint. One quick check is the price to earnings ratio, explained in the P/E ratio, explained plainly. Compare it with the company’s own history and its direct competitors, not with the whole market.
Listening to other investors
Other people’s views are useful as questions, not answers. On TruVest you can read what investors who actually hold a stock are saying, and with Premium see how many holders are in profit and what they paid on average. Use that to find what you have missed, then check it yourself.
A one page summary
| Question | Your answer |
|---|---|
| What it does, in two sentences | |
| Is revenue and cash growing over three years? | |
| Could it survive a bad year without raising money? | |
| What would make me wrong? | |
| Is the price reasonable against its history and peers? |
Common questions
How long should I research a stock before buying?
An hour is enough for the basics: what it does, its numbers over three years, its debt, the risks, and its valuation. More for a large position.
Where can I find a company’s financial information?
In its annual report on its investor relations website, and in filings published by the exchange or regulator where it is listed.
What is the most important thing to check before buying a stock?
That you understand how the company makes money and can explain it simply. Everything else builds on that.
Should I buy a stock because other investors are buying it?
Treat it as a reason to research, not a reason to buy. Find out why they hold it and check whether you agree.