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Bottom Line Up Front

  • Before buying stocks, do some research on the company, paying special attention to things like average annual returns and what industry the company is in. 
  • Consider the stock you’re buying and compare it to the overall market as well as its competitors in the same sectors. 

Time to Read

2 minutes

June 27, 2022

When you make a major purchase, you want to be sure that what you’re buying is worth the price. The same is true for stocks—especially for investors that are taking a long view. 

So, before you buy, do a little homework and ask yourself these questions:

  • What do you know about the company or industry?
  • Is it an older, established company or a start-up? 
  • Is the company profitable, or does it seem to be in trouble?
  • Does the company pay dividends or reinvest its profits?
  • Does the stock have a high growth rate?
  • If the price is low, do you know why? Is it because investors and/or advisors expect poor earnings in the future?
  • Is the stock trading at a discount, and if so, why?

Now that you’ve answered these questions, it’s time to get a little more specific. 

Consider total returns

Some investors are tempted to evaluate a stock based on its returns from the start of the year. But that’s not the most accurate method. Put simply, it’s too short a time. Instead, research its performance over different periods, including:

  • year to date (YTD)
  • 52 weeks
  • average annual return
  • 5-year average annual return

Compare the stock’s performance to the overall market

If a stock has generated a 10% return, is it a good investment? That depends. Compare its return to the rest of the market with market indexes (Dow Jones Industrial Average, S&P 500). If this stock’s returns are on average less than the returns of the major market indexes, you may want to evaluate the risk of betting on one stock rather than a market-tracker. 

Compare it to the competition

You’ll want to know if the stock is doing as well, better or not as well as others in the same industry. Even if a stock is outperforming the market, it could be underperforming compared to competitors, and that could be a red flag. 

Tip: Make sure you’re comparing the stock to similar competitors. For example, don’t compare a small company to a large one with a much longer history.  

Two simple tools that may help are:

Enjoy easier investing

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Navy Federal Financial Group, LLC (NFFG) is a licensed insurance agency. Non-deposit investments, brokerage, and advisory products are only sold through Navy Federal Investment Services, LLC (NFIS), a member of FINRA/SIPC and an SEC registered investment advisory firm. NFIS is a wholly owned subsidiary of NFFG. Insurance products are offered through NFFG and NFIS. These products are not NCUA/NCUSIF or otherwise federally insured, are not guaranteed or obligations of Navy Federal Credit Union (NFCU), are not offered, recommended, sanctioned, or encouraged by the federal government, and may involve investment risk, including possible loss of principal. Deposit products and related services are provided by NFCU. Financial Advisors are employees of NFFG and are employees and registered representatives of NFIS. NFIS and NFFG are affiliated companies under the common control of NFCU. Call 1-877-221-8108 for further information.

This content is intended to provide general information and shouldn't be considered legal, tax or financial advice. It's always a good idea to consult a tax or financial advisor for specific information on how certain laws apply to your situation and about your individual financial situation.