How Do I Evaluate a Stock? (Part Three)
Parts One and Two of the posts entitled How Do I Evaluate a Stock? were focused on ratios and a technical approach to stock analysis. Part Three focuses on a more subjective and big picture approach to considering what might make a good stock investment and what might impact a stock price. These factors and tools include:
1. General research on the specific company including its website and any of its news releases (as these often discuss company information for investors): General research will give you a sense of what the company is up to in its industry and whether it has introduced new products or services, whether they have laid off employees recently, whether they have a new owner or manager, etc. This general research you can do through the use of your search engine skills will produce a great deal of information about the company. The internet is probably your greatest resource for finding out a great deal of information on companies and industries. Most publicly traded companies will provide all of their financial and investor information on their website.
2. Overall investor confidence in the stock market: You likely have heard the terms bull market and bear market. A bull market is where investors are confident in stock market investing, usually because the economy is doing well and the stock prices are generally rising. A bear market is the opposite. Investors are tentative and stock prices are generally going down. Both markets have their advantages and disadvantages as a bull market may mean your stock is going up however, it might be a good time to buy in a bear market as you may pick up a good stock for a low price.
3. Political climate: The views of the party in power (for example, if the government is pro-business and investment) may impact what the stock market may do in the immediate to short term.
4. Industry or sector: The industry or sector the particular company operates in will provide valuable information about the particular stock you are considering. Often, impacts will be felt across an industry or sector so determining what the particular impacts might be in the industry in question will assist in your stock analysis.
5. Inflation/Deflation/Interest rates: Generally, higher inflation means higher prices for consumers and less sales for a company. That, combined with higher interest rates that often go along with higher inflation means that stock prices will often go down. Deflation means prices are falling which has the impact of less economic activity on the part of a company as they are making less money. This also may mean the price of a stock may fall. However, these are general rules of thumb and inflation, deflation and interest rates may impact various stocks in various ways.
6. Your life experience: Your personal experience and what you like to buy, drive, eat, wear, work, etc. is valuable information you can use to make intelligent stock purchasing decisions. What are trends you see in the world around you and how might that translate into which companies grow and which don’t?
World events can have impacts on stocks and your awareness of these factors will assist in your analysis. Likewise, your own “life experience” research will also assist you in determining what companies might be good investments now or in the future.