The most important qualities every good investment possesses

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The most important qualities every good investment possesses

New investors are often interested in buying stocks but are not sure where to begin. These four characteristics should serve as helpful guidelines in your search for a good investment.

1. What is the price of the entire company?

It is important that you look at more than just the current stock price - you need to look at the price of the entire company. The "cost" of acquiring the entire corporation is called market capitalization and is frequently referred to by financial professionals. In short, the market cap is the price of all outstanding shares of common stock multiplied by the quoted price per share at any given moment in time. A business with one million shares outstanding and a stock price of $50 per share would have a market cap of $50 million. This market capitalization test can help keep you from overpaying for a stock.

Another useful tool to help gauge the relative cost of a stock is the price to earnings ratio (or p/e ratio for short). It provides a valuable standard of comparison for alternative investment opportunities.

2. Is the company buying back stocks?

One of the most important keys to investing is that overall corporate growth is not as important as per-share growth. A company could have the same profit, sales, and revenue for five consecutive years, but create large returns for investors by reducing the total number of outstanding shares.

3. What are your reasons for investing in the company?

Before you purchase stock in a company, you need to ask yourself why you are interested in investing in that particular opportunity. It is dangerous to fall in love with a corporation and buy it solely because you feel fondly for its products or people - after all, the best company in the world is a lousy investment if you pay too much for it.

Make sure the fundamentals of the company (current price, profits, good management, etc.) are the only reason you are investing. Anything else is based on your emotions; this leads to speculation rather than intelligent investing. You have to remove your feelings from the equation and select your investments based on the cold, hard data. This requires patience and the willingness to walk away from a potential stock position if it does not appear to be fairly or undervalued.

4. Are you willing to own the stock for the next ten years?

If you aren't willing to buy stocks in a company and forget about them for the next ten years, you really have no business owning those stocks at all. The simple but painful truth of this is evident on Wall Street every day. Professional money managers attempt to beat the Dow Jones Industrial Average, which is a collection of 30 largely unmanaged stocks. Year after year, they fail to do this. It seems impossible that a portfolio managed by the best minds in finance can't beat an unmanaged portfolio of long-term stocks held indefinitely.

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