What To Know Before Investing In A Stock

At this stage, you already know what financial numbers to look out for when investing, in our previous section.

The 8 financial ratios describes the numbers side of the business.

Now, it is about understanding the quality side of business.

One of Peter Lynch's famous quote is "Never invest in any idea you can't illustrate with a crayon."

Now, why is this important?

Most investors, who do not understand the business of the company, will panic and sold their shares.

This is why it is so important to understand the business - so that as you read the news relating to your businesses that you own, you kno whether it will really impact the business.

Here's another example.

Do you know how Google makes money?

Well, it is by adverstising.

Here's a news that came up.

Wow, $1.7 billion.

That seems like a huge amount.

But let's think about this as an investor - will Google stop advertising because of this fine? The answer is no.

Will this fine come every single year? The answer is no.

How much does Google have in cash in 2019 when this happened. The answer is $119 billion.

Now, do you think this will really affect Google and its revenue in the future?

Do you see why it is so important to understand how the company's make its revenue now?

The Two Questions You Need To Ask Yourself Before Investing

So before I invest in any companies, the first thing I would do is to make sure that it passes my financial ratios checklist.

The second thing is to ask myself these two questions:

• Do I understand how the business makes money?
• Do I believe that this business is here to stay for the next 10 years or more.

It is that simple.

These questions will give me clarity whether I should hold on to an investment, whenever silly news comes up.

And these silly news are often opportunity to buy more - but you will only have the courage to buy more, if you truly understand the business. 

Now that we have gone through how to find a quality business, we can then proceed to Stock Valuation.

Disclaimer: Any securities or trades mentioned in this article is not a buy or sell recommendation, any form of investments have its risk and due diligence is to be performed before any investment.