What points should I pay attention to when buying stocks?

Pay attention to the following points when buying stocks:

1. How does this company make money?

If you don't know what you bought, it's hard to judge how much you should pay. Therefore, before buying stocks, you should know how this company makes money. This question sounds simple, but the answer is not always obvious. As an investor, you must read the company's latest annual report, from which you can learn about the company's business composition and the details of sales and income data of various businesses. You can also find the answer to another key question: is it possible for these gains to be converted into cash in the hands of investors? Although "net income" and "earnings per share" will make headlines in commercial media, these are just accounting concepts.

For shareholders, the most important thing is tangible and guaranteed cash, whether it is distributed to shareholders in the form of dividends or reinvested in the company's operations, thus promoting the company's share price. Open the cash flow statement in the annual report to see whether the company's "operating cash flow" is positive or negative, and whether the cash flow is increasing or decreasing. Look for any red flags: net profit is increasing, while cash flow is decreasing. If so, it may be a sign that the company has used "creative" accounting methods to exaggerate the book profit, which is of no benefit to shareholders.

2. Is the sales volume real?

When it comes to cash, it is important to understand that according to accounting regulations, a company can include a certain amount of cash in its sales revenue, long before the cash actually arrives (in the worst case, it will never arrive). This may greatly affect the current price of the stock you intend to buy. Then how do you know if there is such a thing in the company? This can usually be seen clearly from the income report submitted by the company.

But sometimes, this warning signal of income manipulation is hidden. For example, be wary of companies whose sales revenue is growing much faster than their competitors. If you can't see the specific reasons for the company's sales growth, for example, a certain product of the company is particularly popular, then you should be more careful. In addition, be careful of those companies whose only way to achieve sales growth is to merge other companies. If a company buys several companies every year on average, the motivation may be that the management wants to meet the short-term expectations of the stock market. In the long run, integrating several independent companies may be a mess and pay a heavy price.

3. How does this company do compared with its competitors?

Before buying a company's stock, it is very important to know how it accumulates its competitive strength. The easiest thing to do is to analyze the company's sales data. The best clue to know whether a company is better than its competitors is its annual income. If the company is in a high-growth industry (such as video games), how does its sales growth compare with its competitors? If the company is in a mature industry (such as retail), has the sales in the past few years been flat or increased? Pay special attention to the sales performance of new competitors, especially those industries that have stopped growing. When comparing the company with its competitors, don't forget to compare the costs.

4. How does the economic environment affect the company?

Some stocks are very cyclical, in other words, the company's performance depends largely on the overall economic situation. Periodically fluctuating stocks sometimes look cheap, but not necessarily. For example, when the economy is depressed, the share price of paper companies may become very cheap. However, there are many reasons for this situation: economic depression, many companies reducing advertising costs, fewer pages of newspapers and magazines, so the sales of paper enterprises have decreased. Of course, when the economy goes out of the trough, things will develop in another direction.

Investors should pay close attention to the trend of interest rates, because changes in interest rates will have a great impact on many industries. For example, the sharp drop in interest rates in the past two years has led to a sharp increase in housing refinancing and consumer spending. This is of great benefit to residential builders, electrical appliance manufacturers and retailers. However, it is impossible for interest rates to continue to fall, and most economists also predict that interest rates may rise in 2004. Therefore, the growth of companies benefiting from interest rate cuts may slow down significantly.

One of the most important factors to consider before buying stocks may be the degree of price competition in the industry where the company is located. The price war may be of great benefit to consumers, but it will quickly reduce the company's profits. For a company, for every 5% decrease in product sales price, the sales volume must increase by 18%, so that the company can maintain its original profit. Most industries can't increase sales so much. In most cases, companies that launch price wars must have a much stronger cost advantage than their competitors if they want to ensure profitability.

5. What factors may damage or even destroy the company in the next few years?

Before investing in a company, you must take into account the worst situation that this company may encounter in the future. For example, if a large part of a company's sales come from a customer, then if the company loses this customer, its sales may be greatly reduced. Look at the company's IPO prospectus (if the company has just listed) or the latest annual report submitted by the company to the CSRC, you can understand these risks.

Some companies are inherently riskier than others. Look at those biotech companies that don't make money. After their magic medicine failed to pass the examination and approval of the Food and Drug Administration, their share price suddenly fell from the sky to the ground. This also makes us realize another important point: if the performance of a company depends largely on someone's behavior and reputation, then you should be wary: the risk of this stock will naturally be several grades higher than that of ordinary stocks.

6. Did the management hide the expenses?

Throughout the history of a company, write-offs and restructuring expenses are usually inevitable. However, if a company has the habit of calculating "one-time" expenses year after year, everyone should be on guard: this actually makes it impossible for investors to know how much the company's profit is. For example, if you find that a company's income statement in the past five years has a one-time expenditure for at least three years, you should be wary of this stock. Check the explanation of one-time expenditure in the notes at the back of the financial statements; Sometimes this expenditure comes from measures that are actually beneficial to the company, such as repaying debts in advance through refinancing at a lower interest rate. But on the whole, this kind of expenditure is bad news for those who are interested in investing.

7. Does the company do what it can?

Even if the company's profits look good at present, if the company accumulates a lot of long-term debts, this good time will not last long. Before buying any stock, you should look at how much debt is on the company's balance sheet-too much debt is risky, because reduced sales or higher interest rates may endanger the company's ability to repay debt interest. In addition, the high debt ratio greatly reduces the profit rate of the business. In addition, creditors have the priority to get compensation: the company must repay the interest on the debt first, but has no obligation to distribute dividends to shareholders. To judge whether a company has too much debt, you can divide the long-term debt by the total capital (debt plus shareholders' equity-both of which can be found on the balance sheet). If the result is more than 50%, it is likely that the company's debt exceeds its repayment ability.

But it's not just debt that bothers the company. For shareholders, options-extra wealth beyond executive compensation in the usual sense-are an expensive expense. In the notes of the company's annual report, the company's income after including options must be disclosed. Be sure to read this part of the explanation: options can instantly turn declared profits into losses.

8. Who is in charge of the overall situation?

It is usually difficult for an outsider to evaluate the quality of a company's management team. However, experts believe that investors should still consider some traditional indicators before buying stocks. Investors can read the letter written by CEO to shareholders in the annual reports over the years. See if the information conveyed by the company's management is consistent, or often change the strategy, or blame the company's poor management on external factors. If it is the latter, we should avoid this stock.

Donald Sall, CEO of Harvard Business School and assistant professor of organizational behavior, believes that even if the corporate headquarters can explain the priorities of the management team, "if I see that this corporate headquarters is a huge new building, I will sell this stock. There are many examples of shareholders' money being so squandered. " Sal warned that investors should avoid companies with the following things in the new headquarters building: architectural design awards, waterfalls in the lobby or helipads on the roof. Although this warning sounds a bit funny, Sal insists that he is serious: "The management said,' We won, now we should put up a monument to celebrate. But they didn't think,' We won, but wait a minute: this doesn't necessarily guarantee that we will win in the future'. "

9. What is the real value of the company?

If the stock price is too high when you buy it, even buying the stock of the best company in the world will become the worst investment. Similarly, if you buy a stock at a low price, even if the company's fundamentals are flat, it may become a star in your portfolio.

If the stock you want to buy has a huge turnover recently, hitting a new high in a year, find out the reason behind it: this stock is sought after by everyone and cannot be the reason for you to buy it. P/E ratio (stock price divided by earnings per share) is still the best and quickest way to measure the value of a company. Generally speaking, most value-added portfolio managers will not touch a company with a market value of more than 30 times, even if the company is in a growth industry (why? If investors want to profit from investing in such a company, the return of the company must be higher than the overall market value (50%).

Remember, if you use the expected earnings in 2008 or the year after to calculate the P/E ratio, you are guessing, not calculating. The next key step is to review the cash flow statement to see if the operation brings positive cash flow (preferably increased cash flow). If a company's cash flow is always negative, then the rise of its share price is mostly wishful thinking, not economic truth.