Investing

10 things to understand before you buy any investment

You don't need to be a professional analyst to invest well. But before you put money into any single stock, you should be able to answer these ten questions in plain language. If you can't, that's useful information too.

The ten questions

1. 1

   What does the company actually do?

   If you can't explain the business in a sentence, you're not investing — you're guessing.

2. 2

   How does it make money?

   Know the actual product or service that produces the revenue, and who pays for it.

3. 3

   Is revenue growing?

   Revenue is the total money coming in. Flat or shrinking revenue is a warning sign.

4. 4

   Is it actually profitable?

   Revenue isn't profit. A company can sell a lot and still lose money on every sale.

5. 5

   How much debt does it carry?

   Heavy debt makes a company fragile when conditions get hard or rates rise.

6. 6

   Does it have cash?

   Cash on hand is what lets a company survive a bad year without a fire sale.

7. 7

   Is the price reasonable?

   A great company can be a bad investment if you overpay. Valuation is the price you pay for the earnings you get.

8. 8

   Who are its competitors?

   Understand what stops a bigger, richer rival from simply taking the business.

9. 9

   What has to go right to grow?

   Know the story you're betting on — new products, new markets, higher prices — and how realistic it is.

10. 10

    What could go wrong?

    Every investment has a real risk. If you can't name it, you haven't found it yet — you've just ignored it.

The honest shortcut

That's a lot of work to do for every single stock — which is exactly why most people are better off owning an index fund instead. One purchase spreads your money across hundreds of companies, so no single answer above can sink you, and you skip the research entirely.