One of the worst reasons to buy a stock is because you look around and see people using a company’s product. I’ve heard of people saying that they like Chipotle burritos, so they are going to buy the stock. Or that all their co-workers drink K-Cup coffee, or that everyone needs gas to drive, etc. While it’s a great thing that a company sells more of its product, that doesn’t mean the profit that it generates makes the company stock a good value.
There is very little difference between thinking like that, and buying a house back in 2005, because “housing always goes up”. People bought overpriced homes without evaluating the return that house could get through the rent. This would be considered the return on investment, and it needs to be a reasonable number.
Similarly, you always need to evaluate the company’s financials before buying a stock. Do you know what the current P/E of the company is? The sales and EPS growth rates? Is the company generating a good return on equity and assets? What has the track record of the last 5 to 10 years been for all these metrics?
When you hear questions like this, and have no clue what I am talking about, then please, don’t lose your money and don’t buy the individual stock until you have some experience in evaluating companies.
Just buy the S&P 500 Index instead.
This is the core JeeMoney advice that I give to all who ask what stocks to buy, without having experience in what they are doing. I tell them to buy a little bit of the 500 biggest companies in the USA.
Read Full Story: Read this before dumping your life savings into Nintendo stock