Written by Norman Isaac Mwambazi

9 things that tell if a stock is worth buying

You have saved some money from your other investments and now you want to enter into the vast business of …

You have saved some money from your other investments and now you want to enter into the vast business of stock investment. You are wondering wh.at kind of stock is worth buying from a list of over 630,000 publicly-traded companies around the world.

As you may already know, a stock is a share of a publicly-traded company and it comes in different types with different privileges to the owner. Companies list their shares on stock exchanges for different reasons but mostly to generate revenue.

It is also important to note that not all companies give dividends to their shareholders so you should have this in mind when choosing what type of stock to buy, from which company, and when.

In this article, I will give you nine ways that can tell you if a company’s stock is worth buying.

Price

When talking buying anything, price should come first. You need to know how much a company’s stocks cost and how many you can get depending on your budget. Companies split their stocks to have more stocks available for trading at a reduced price. Other companies never have any splits, which makes their shares have a higher price.

As an investor, it makes sense to buy shares at a low price and sell at a higher price for a profit but this does not happen suddenly. Analysis should be done before buying by looking at the underlying factors that influence the price of such stock.

Revenue Growth

A company’s growth is measured mostly by its revenue growth. The growth of a company’s revenue over time also contributes to the rise of its share price. A company’s stock is worth buying if its revenue is steadily growing because that shows you will get a return on your investment.

While analysing revenue of a company, it is advisable to look at how the company has performed in the last quarter, or last year, or the year before that. An upward growth curve is a good signal, and the downward curve showing declining revenue is usually a bad sign for that company’s stock.

Earnings Per Share

Earnings per share (EPS) is a company’s net profit divided by the number of shares it has sold. EPS is the money a company makes on each share of its stock. Companies that have a higher EPS are usually in better shape so their stock is worth buying, and the reverse is true for those with a lower EPS.

 However, there is often a debate about the best range for EPS, and companies can manipulate it by buying back shares, thus boosting EPS without actually increasing profits.

Dividend and Dividend Yield

At the beginning of this article, I talked about dividends as one way an investor can earn from their shares. Many established companies pay out dividends to their shareholders either at fixed times say quarterly, or over a certain period depending on the type of stock they hold in that company.

Companies with high growth potential rarely pay out dividends because they mostly reinvest their profits to facilitate their growth and expansion. Companies with a high dividend payout and dividend yields are believed to be worth investing in, as investors see dividends as an additional source of income.

Look out for companies that have increased their dividend over time, their stock is worth buying so you can also enjoy their future profits. Worthy to note is that just because a company does not pay dividends does not mean its stock is not worth buying. It depends on what you prefer. Dividends or growth. 

Market capitalization

When looking for a stock to buy, it is important to look at a company’s market capitalisation because it represents the value of its shares. Companies with a large market capitalisation usually called “Big cap,” are believed to give investors steady growth and return on their investment.

These large companies usually have good management, have stood the test of time and are not easily shaken by market change waves. Their stock is worth investing in because more often than not, a profit is guaranteed because they have done it for years. 

Big is better, they say.

Historical prices

Price was the first thing I said you should consider while looking for worthy stocks to buy, and it is important to compare and contrast stock prices of a company over a period of time, and not just from one quarter.

When you go through the “price history” of a certain stock, you will see times when its price went up, stayed stagnant for some time, or declined, and in what seasons. When a company’s stock price has risen consistently more times than it has declined, that stock is worth buying because it is believed to bounce back after having a rough patch.

When we look back at where we have been, it helps us predict where we are headed.

Analyst Reports

As an investor, you might not have the time or patience to study and analyse the market to make informed investment decisions. This is where stock analysts and investment advisors come in.

These have a wealth of experience in the stock market and use a host of tools to analyse the market, like employing fundamental and technical analysis techniques and strategies to make their stock reports.

As an investor, it is upon you to read these reports which usually have “buy”, “hold”, and “sell” recommendations, and decide on what to do. It is worth noting that several analysts will have different reports about a stock depending on their reasons so it is better not to rely on one before making your investment decision.

The Industry

Before buying stock, it is important to analyse the industry within which it is operating. Things like how the industry is performing as a whole. Is it growing? Are companies in that industry thriving or struggling?

For example, when evaluating a company such as Boeing, it is important to look at how the entire airline industry is performing. Sometimes the performance of the entire industry reflects the performance of a company’s stock.

Major economic indicators

Although the economy and the stock market are two separate things, they are linked. A thriving economy means companies are doing well so their stocks are performing well too whereas a receding economy means companies are struggling, and so are their stocks.

Economic indicators like unemployment, industrial production, consumer spending, inflation, and interest rates among others affect the performance of the economy, which in turn affect the performance of companies.

You should not overlook these indicators when making your decisions on when to buy stock and which is worth buying.