Factors to Consider When Picking Stocks for Investment

When considering any type of stock investment, the investor needs to understand the potential future performance of the company and the factors than can influence that performance. Listed below are the three primary factors that can impact how well a company does in both the near and longer-term.

The Overall Health of the Economy: The current state of the economy has a direct impact on how well a company of interest might do in the near and more distant future. Interest rates, the level of unemployment and rate of inflation (among other things) play a significant role in consumer tastes and demand, as well as the decisions the company will make regarding growth and expansion.

The State of the Industry: When choosing any particular stock for investment, it is important to consider the growth phase of the industry in which the company operates and the events that can impact that industry. Some events (economic, political, or other) may impact the vast majority of companies very little, but bring significant change to a particular industry.

The Individual Company: Through proper fundamental analysis, investors can develop a good sense of the financial health and viability of a company and run valuations to determine the attractiveness of the stock at its current market price. To be more thorough in their due diligence, many investors will visit the company and try its products or services. They may also evaluate the strength of the company’s management team and follow news and press releases pertaining to the company.

Understanding the Company’s Business Strategy

In addition to reviewing the factors listed above, investors should understand how the company seeks to differentiate itself in the marketplace. In general, companies will try to accomplish this in one of two ways:

Product Differentiation: The company may offer a product or service that provides unique benefits or higher quality. In doing so, the company may command a higher price that its competitors.

Low Cost: Under a low-cost strategy, the company enjoys greater efficiencies that its competitors and is able to provide its product or service at a lower price.

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The above information is educational and should not be interpreted as financial advice. For advice that is specific to your circumstances, you should consult a financial or tax advisor.

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