Smart investors put their money in well-known companies and thoroughly investigate new companies before investing their money. Investors can choose quality and good value stocks after carefully considering the quality of the companies to be invested in and combining them with your current market knowledge. Choosing a company to invest in is not an easy matter. Mutual fund companies and the like use teams of experts to research and understand how to invest in a company. Make sure you have the time and desire to invest on your own, as well as a willingness to take the risk.
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Method 1 of 3: Buying Well-Known Stocks
Step 1. Stay within your competence
If you have expertise in a particular area, we recommend using your expertise to identify related qualities. Experience can give you the inspiration you need to make decisions. For example, if you work for a retail company, you have more knowledge about investing in Walmart, Target, or Best Buy than companies in any other field.
Competence in a particular area does not only come from work experience. If you are a “tech savvy” person and know a lot about the latest mobile devices, you can use your knowledge to invest in technology sector companies
Step 2. Focus on a few industries or markets
The chosen industry or market may be in your area of competence, or another area of interest to you. The most important thing is to realize that you can't track everything that's happening in the global economy. Large financial institutions have special departments because it is impossible to deal with this problem alone. Therefore, focus on only a few selected key industries or markets.
However, that doesn't mean you shouldn't focus on individual companies. Always investigate all companies that you will invest in individually
Step 3. Know the latest news related to the industry
Examples of trusted news sources include sites like Bloomberg, and the Wall Street Journal. These sites provide the latest information on various sectors of the economy and the world. Again, focus on only a few key areas and read the latest in the industry. Look for things like trends, mergers, acquisitions, relevant policy changes and all global events that affect your market.
Step 4. Make a plan
Identify companies that profit from changes or market trends. Predict when this change will occur and prepare your funds to invest in the company. For example, if you feel that a new product released by your favorite company is going to be a big hit, it's a good idea to invest your money in the company before the rest of the world agrees with you and the stock price rises.
Method 2 of 3: Invest in Companies with Competitive Advantage
Step 1. Understand about competitive advantage (competitive advantage)
There are several companies that have been able to consistently generate profits and have been successful in their industry for many years. These companies have “moats” holding their competitors back. The distance between a company and its competitors is called a competitive advantage. Competitive advantage enables the company to generate a lot of profit and retain its customers more easily than its competitors. In exchange, the company is able to provide greater value and returns to its shareholders.
- By investing in these companies, you can participate in giving the company a competitive advantage. Although companies will not grow as fast as small companies, they very rarely fall into economic crises and can deliver consistent growth in the following years.
- Blue chip stocks are an example of a large and successful company with a competitive advantage. These companies have delivered consistent growth or dividends over the years and are listed on major stock indexes.
Step 2. Invest in trusted brands
Think of famous brands like Rinso, Coca Cola, and Teh Sosro. These brands have an image as the best brand in their field in the public's mind. These companies can increase the selling price because of the strong brand image so that the profit earned is also getting bigger. These companies are very well known and it is almost impossible to lose customers to their competitors.
Step 3. Find the company with the highest switching costs
When was the last time you changed banks? Or cell phone operators? These services retain their customers because the switching cost or the cost of switching to competitors is quite high. Companies that have high switching costs can retain their customers longer.
Step 4. Find the company's economies of scale
Companies that are able to make products and sell them at lower prices than competitors can automatically attract more customers, as long as the quality is no less good. In highly competitive markets, this is usually the result of economies of scale, a phenomenon in which large firms have low production costs due to their large size. Walmart and Dell have applied this concept well.
Step 5. Invest in legal monopolies
Some companies are granted legal (if temporary) monopoly rights by the government. Large pharmaceutical companies and manufacturers with patents are able to provide unique products to the market. Companies with copyrights, drilling rights, mining rights, and various protected rights are often the main producers or service providers in their markets. Thus, these companies can increase prices without fear of losing customers so that the profits are increased.
Make sure you check the expiration date of the company's patent or usufruct. Sometimes these rights are temporary and when they expire, the company's profits may also be lost
Step 6. Look for opportunities to grow easily
Some companies are easy to scale. This is because the product or service has the potential to add to the network or increase the number of users over time. For example, Adobe in publishing, Microsoft Excel in paperwork, and eBay for network users. Each additional user on the network costs the company almost nothing. All the additional revenue that comes with the development of the network goes directly to the company's profit.
For a recent example, take a look at Netflix. As a streaming service, the company earns revenue as its subscribers grow, although its operating costs remain almost unchanged. Thus, the more users, the greater the profit, assuming the company does not increase its costs significantly
Method 3 of 3: Evaluating Company Performance and Rating
Step 1. Check the quality of the company's management
How competent is the management in managing the company? More importantly, how focused is management on the company, customers, investors and employees? In an era characterized by a lot of corporate greed, it's best to do research on the management of all companies to be invested in. Read newspapers or magazines for information.
It is not only limited to good financial statements. Instead, look for indications of other important qualities such as reactivity, adaptability, ability to innovate, and organizational capability
Step 2. Monitor changes in management
A good leader can change a company that many people think is over. Watch news and financial reports regarding changes in management positions, especially with the CEO (Highest Executive Officer). If the new CEO of a company is promising enough according to your research, then invest in that company. Basically, you put your trust in the person instead of the company as a whole.
Step 3. Stay away from overvalued stocks
Even large companies can be overvalued. Learn to interpret financial statements and select stocks with fundamental analysis to find companies that are overvalued by the market. Keep in mind, these companies may be very well known and many investors invest there, but the companies are still too expensive and can suffer drastic declines when their golden age is over.
- One way to detect stocks that are priced too high is through the price-earnings ratio. This ratio figure can usually be found in the company's stock overview on financial websites. Generally, this ratio ranges from 20-25, depending on the industry.
- PE ratio evaluation is done by finding the average PE ratio in the company's industry. If the company's ratio exceeds the industry average, the company's stock price is too high against its earnings.
Step 4. Buy undervalued stocks
Undervalued shares are shares that are traded at a lower value than the company's financial information. These companies have usually only performed well recently. In this case, the market has not yet found the company's new success. To identify companies that have the potential to grow rapidly, you can also use the PE ratio and compare it to the industry average.
Step 5. You can also look for companies with a price-to-book-value ratio of less than 2
The ratio of price to book value is the company's price divided by its assets (excluding liabilities and intangible assets). A low ratio means that the company's price is relatively cheap.
Tips
- Start thinking about everyday companies with this new frame of mind.
- Learn the basics of how to read financial statements. See the profitability of companies that interest you. Check the debt position. See if the company has steady growth.
- Visit corporate websites and other financial sites that provide inspiration for investing in stocks.
- While it is recommended that you invest in well-known companies, don't limit yourself to just one or two sectors of the economy. Try doing research on companies in various sectors. Thus your portfolio will be more diverse so that your investments have a "safety net" in case one of the investment sectors falls.
Warning
- Beware of stock investing tips: The tips someone gives on television or in person, are usually not well researched and are based solely on one or two people's theories on how to get rich quick. They may also be paid by someone to raise the share price so that the company can raise as much capital as possible.
- You will quickly lose money if you start investing in stocks without thorough research.
- Risk always accompanies investment. Even if you've done everything right, no one can guarantee you won't lose money.
