When buying a stake in a company, you can’t know how the stocks will actually perform. When investing, you may not think about whether the stock will go up or down a year from now because it’s not about building wealth.
You can easily describe how the stock generates profits
Many new investors risk their precious money in a company they don’t know much about. You should be able to explain how the stock generates its profits in a few simple sentences and plain words. You should also talk about the major costs involved. For example, if you are considering buying shares in a tire manufacturing company, the cost of rubber will be a significant factor. If you want to invest in shipping or freight, the cost of fuel will be important in evaluating the deal.
It generates high returns on capital
Whether the company is capable of delivering long-term returns to its owners over decades will depend on one metric more than any other: return on capital. This is the way to measure the profit a company can achieve against the amount of money invested by shareholders and others. Simply put, this return tells you how well the company can turn cash into profit.
Its products or services are competitive
Most people don’t care which brand of nails they choose from the local hardware store or which farm grew their corn. However, they do care about whether the store sells the brand of chocolate or soda they prefer, or whether the local discount retailer sells the brand of toothpaste or mouthwash they’ve used for years.
The company’s management works to please shareholders
Good companies often return excess cash to their owners. This may come in the form of smart stock buyback plans or a healthy dividend distribution plan (such as one that grows at a rate far exceeding the general inflation rate).
The stocks are fairly priced
Even the most stable and high-yielding stock in the market can be a poor investment if you pay a high price to buy it. Many would argue that price is the factor that stands out more than others in the long run. This is because poorly performing businesses, even when purchased at a low price, can yield high profits and wealth in the right context. The ideal scenario is to find a company you trust and respect that sells its shares at a fair price.
It can survive tough times
There is no doubt that there are times when storms hit the market. These storms often come without warning and wreak havoc on your bottom line. The market is shaped by ups and downs, and those who are willing to win (or lose) more are those who invest in these extremes.
Conclusion
When buying a stake in a company, you can’t know how the stocks will really perform. However, there are some signs that indicate it may be good for the long term. The company may have the ability to survive if it generates high returns and if there are loyal buyers for its products or services. The stock price can be a crucial factor in long-term value. To get indicators of the company’s health, look at how it treats its shareholders and whether it has survived tough times in the past.
Sources:
– U.S. Securities and Exchange Commission. “Exchange Act Reporting and Registration.”
– The Street. “10 Stocks With High Returns on Investment Capital – and Why You Should Care.”
– Raju, J., Srinivasan, V., & Lal, R. “The Effects of Brand Loyalty on Competitive Price Promotional Strategies.” Management Science, 36(3), 276-304.
–
The Wall Street Journal. “How the Pros Tell If a Stock Is a Bargain.”
Source: https://www.thebalancemoney.com/signs-a-stock-might-be-a-good-long-term-investment-4108162
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