5 Things You Should Know Before You Buy a Stock or Fund

by Stacy Francis, CFP®, CDFA

A friend of mine is an aspiring author, and eventually wants to leave her corporate job. Over bouillabaisse and freshly baked baguettes the other night, she announced that she just sold her first short story, to an Ezine. All smiles, she explained what an important step this is for her writing career since, as she put it, now she’s googlable. This very versatile new verb got me thinking about the many, many ways the Internet helps investors. Just imagine the amount of information now at our fingertips; information to which, as little as fifteen or so years ago, investors had very limited access. Below are a few googlables to consider before you buy a stock or fund.

1. Essence. What does the company (or companies, in case of a fund) do? My general advice is that if you don’t understand the business, you shouldn’t bet your money on it. To stomach the ups and downs in the markets (especially today), you have to feel good about your investment.

2. Sales. Are whatever products and/or services the company produces actually selling? If they are gathering dust in a warehouse, chances are your money will, too.

3. Cost control. A $10,000,000 golf retreat for the executive staff is hardly effective use of your capital. Put it to work elsewhere.

4. Debt. People aren’t the only ones who suffer when overwhelmed with debt. Find the leverage ratio (calculated as total assets divided by shareholder equity) for the company (or companies) you’re considering. If it is higher than 5, reconsider.

5. Bad news. Nothing spreads faster than bad news. If there’s anything fishy going on, chances are somewhere on the World Wide Web, someone picked up on it.

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