Have you been standing on the shore watching a turbulent stock market—but think you might be ready to jump back in? Or are you a first time investor who wants to dip a toe in the water, but wonder if individual stocks are right for you?
Whichever description fits, here’s a tip for staying afloat: buy what you know. Put another way, invest in companies you’re familiar with, and whose products you buy.
Maybe you savor the food at that franchise restaurant. Perhaps you always shop in a certain store because you’re sold on the quality and prices. What suppliers do you conduct business with at the office? What brand name do you consistently purchase at the grocery?
Once you’ve identified companies that manufacture or sell items you buy frequently, put them through the “friendship test”: Would you recommend the product to your friends?
If the answer is yes, you might have a prospect to add to your portfolio. But before you venture into the deeper waters of buying shares, you’ll need to strap on a personal flotation device. In investing language, that means research.
Dive into investment publications, financial newspapers, analyst reports. You can find most of these resources free at your local library. Then visit the company’s web site and download the most recent annual report.
Here are examples of what you want to know.
- Is the company financially sound?
- Where does it rank against competitors in the industry?
- Has the same management team held key jobs for a number of years? How many shares do they own?
- What does the dividend payment record look like? How about the earnings history, current yields, current ratio, capitalization ratio, and price earnings ratio?
- What plans does the company have for the future?
Of course, there are no guarantees that an investment will be a winner, despite your familiarity with a company and its products. But swimming in waters you know can help reduce unpleasant surprises.