How to know if a company is worth investing in? It's not enough to know a company's worth–smart investing involves researching a company, knowing important details like the stock's 52-week average, and how the company operates.
Is a Company Worth Investing In?
It's sad to hear otherwise intelligent people talk about wanting to invest in a company like Starbucks because "everybody drinks coffee." A company's ubiquity, popularity or long-term viability is tied to a number of different factors and not just its profitability potential. Another thing to keep in mind–just because a company loses money, even a substantial amount of money, does not mean they are a bad investment.
In such cases, timing, duration and cause are important factors. You should also review a company's debt- to-earnings ratio. Not all stocks are the same, and even powerful companies in the tech sector can vary greatly.
Here's a great example–look at the two tech giants Microsoft and Apple. Both have been on the market for a very long time. But comparing the stocks of these two companies? Look for yourself. On August 20, 2020, the NASDAQ listing for Microsoft was at roughly $209 a share.
On the same day, Apple Inc. was listed at just over $462 a share. What are the factors that contribute to this big disparity in prices? We could discuss these factors at length, but for this article, suffice it to say that a number of variables affect a stock's price.
If you want to know a company's worth, you have to look at these numbers far beyond the day-to-day and look for earning trends, the ups and downs of the stock over the long term, and external factors that affect how a company does business.
By "sustainability" we aren't talking about a company's environmental practices, but rather how durable the business model and other factors are over the long term.
For example, Starbucks has a corporate policy of doing business with local communities, and this is something that has been associated with the brand for a long time. But what happens if Starbucks one day suddenly decided to stop supporting local farmers and start doing massive corporate coffee farming?
That radical shift (and one that would be quite unpopular with a significant portion of the Starbucks customer base) would dramatically affect the company's bottom line.
It's fairly certain that this particular company is unlikely to make such a decision, but some have made big choices that negatively affected the stock, and that is the sort of information you need to know and understand if you are researching a company to see if it's worth investing in. Has the company made such choices in the past? Are there talks about making one now?
Reputation Among Investors
Notice a trend here? A lot of what you should look for that makes a company a sound investment is similar to online shopping "best practices". In other words, don't invest in a company that has a bad reputation among seasoned investors who know bad risks when they see them.
Do some homework on the company's reputation among investors and you may get a better idea of why some particular stocks are losers and why some are winners. This logic does not apply to all investments across the board, but you can learn a great deal by paying attention to the habits of more experienced investors.