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The stock market is a deceptively promising place. It’s true that the rewards could be high, but the risks are not always obvious and many have fallen prey to the volatility of the market. That said, this may be a good time to make your foray into stocks as prices have generally come down due to a weaker economy in 2020 and for the foreseeable future. Here are a few important things to focus on when you’re researching to buy your first stock. These will help you to understand and make informed decisions about the risks you could face from a potential investment.

Understand the type of business/industry

Knowing the industry helps you benchmark a company’s performance against its peers, as well as to project expected returns months or even years down the line. Follow the news – what are analysts and insiders saying about industry prospects? New innovations or unexpected events could significantly raise the value of a stock by raising demand for certain products/services. On the other hand, avoid sunset industries such as oil and gas and the printing business. For example, many fossil fuel companies are already exiting carbon-intensive energy models while transitioning to renewable energy.

Gauge the company’s growth potential

Perhaps a company has a patent on an industry-changing technology, or maybe it’s one of the only few competitors in a high-growth market. These kinds of outlook are ‘soft’ indicators of a company’s potential to offer great value for your investment. Two metrics to gauge a company’s growth potential are the price-to-earnings (P/E) ratio and return on equity (ROE). The P/E ratio is an indicator of the market’s sentiments towards the company – a high ratio means continued earnings growth is commonly expected. ROE reveals the ability of the company to generate profits for its shareholders. An ROE that is trending upwards means the company is growing in value.

Assess the company’s management

Management quality can make or break a company. A good place to start is the company’s corporate report, which should give you key details about governance and the management’s approach on business strategy. Check the previous track record of key personnel in senior management, such as the chief officers. Sound corporate management is related to the qualitative leadership and decision-making processes in a company as much as it is about financial performance.

Improve your financial literacy

 

Financial literacy matters to your investment decision-making. Familiarise yourself with the golden rules of investing such as diversification, risk profiling, and the dollars and cents not just of stocks but of other available investment options as well. There is a lot of variability even in the stock market itself, and many different strategies that you could use. For instance, investors with short-term goals may adopt an active investing approach, while longer-term investors take a passive approach to investing.

Consider getting help

Spending time managing your own stocks and doing the necessary research is a lot of work. A unit trust is a portfolio of stocks that are carefully selected to diversify risks across various asset classes. You can get started with a CIMB unit trust fund investment for as low as RM1,000, professionally managed by fund managers who can help you reach your investment goals.

 

Start investing early to grow your wealth in just a few clicks online, or contact us to discuss your investment goals and how we can help.

 

This article is for informational purposes only and CIMB does not make any representation and warranty as to the accuracy, completeness and fairness of any information contained in this article. As this article is general in nature, it is not intended to address the circumstances of any particular individual or entity. You are advised to consult a financial advisor or investment professional before making any decisions based on the information contained in this article. CIMB assumes no liability for any consequences arising from your reliance on the information presented here.