Understanding the basics of stock is a prerequisite to being a good investor. Wouldn't you love to be a business owner without ever having to show up at work? Imagine if you could sit back, take a holiday in the Bahamas, watch your company grow, and collect the dividends (a form of remuneration) as the money rolls iin.
This situation might sound like a pipe dream, but it's closer to reality than you might think. As you have probably guessed we are talking about owning stocks.
This excellent category of financial instruments is, without reservation, one of the greatest tools ever created for building wealth. Stocks are a part, if not the cornerstone, of nearly any investment portfolio. When you start on your road to financial freedom, you need to have a solid understanding of stocks.
Today we will focus on a detailed explanation of how to choose a stock and the types of stock.
How to Choose a Stock
Choosing the right company to invest in may sound like the first step in building a portfolio, but financial advisors say that a beginning investor shouldn't actually "begin" with individual stocks. If you're just starting to build your investment portfolio, buying a single stock is much riskier than buying a low-cost mutual fund that tracks a large group of stocks, and it's more likely that you'll see sharp, sudden changes in the value of your investment if you own just a few stocks.
If you already have a diversified portfolio of mutual funds, then you may want to add in a few individual stocks. With the risk of an individual stock, there's also the potential for greater returns. However, if you build your portfolio by picking stocks yourself, you'll save some money compared to an investor who pays a fund manager through the fund's expense ratio, to pick stocks.
As an investor, you must always be mindful of the fact that when you buy a stock, you become a part owner of that company and your focus should be on the long term performance of the company rather than on the short term share price fluctuations. Thusthe value of your investment depends on the long term health of the business. In selectingstocks investors must be mindful of the following:
Buy what you know: Start with an industry or a company that's familiar to youespecially if you are new to stocks. We recommend that you buy what you know because if you identify that a company is doing well in terms of the product qualitydistribution and performance it may be a start off point to investigate more aboutthat company. Further, it is not advisable to buy stocks without fully understanding how those companies plan to expand or make good revenue.
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Consider price and valuation: Investment experts often look for stocks that are "cheap" or "undervalued." Generally, what they mean is that investors are paying a relatively low price for each cedi the company earns. This is measured by the stock's price-to-earnings ratio, or Price Earning (P/E. The P/E can be calculated by dividing a company's share price by its net income).
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Know more about the company you want to invest in: A company that isexpected to grow rapidly will be more expensive than an established company that's growing more slowly. Compare a company's P/E to other companies in the same industry to see if it's cheaper or more expensive than other companies in the same business.
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Cheap isn't always good and expensive isn't always bad: Sometimes a stock is cheap because its business is growing less or actually slowing down. And sometimes a stock is expensive because it's widely expected to grow its earnings rapidly in the next few years. You want to buy stocks that you can reasonably expect will be worthmore later, so look at value combined with expectations for future earnings.ÂÂ
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Evaluate financial health: Start digging into the company's financial reports. All public companies have to release quarterly and annual reports. Check the Investor Relations section of the company’s web site, or find official reports filed with theSecurities and Exchange Commission (SEC), Ghana Stock Exchange (GSE) or other regulators such as the Bank of Ghana. Don't just focus on the most recent report: What you're really looking for is a consistent history of profitability and financial health, not just one good quarter.
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Look for revenue growth: Anything can happen day to day, but in the long run, stock prices increase when companies are making more money, which usually starts with growing revenue. You'll hear analysts refer to revenue as the "top line."
Check the bottom line: The difference between revenue and expenses is a company's profit margin. A company that's growing revenue while controlling costs will also have expanding margins.
Know how much debt the company has: Check the company's balance sheet. Generally speaking, the share price of a company with more debt is likely to be more volatile because more of the company's income has to gointo interest and debt payments. Compare a company to its peers to see if it's borrowing an unusual amount of money for its industry and size.
Dividend Payment: A dividend, a cash payout to stock investors, isn't just a source of regular income; it's a sign of a company in good financial health. If a company pays a dividend, an investor must look at the history of their payments. Are they increasing dividend or rather decreasing dividend payments?
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What not to do when buying a stock:
Don't buy on price alone: Don't assume a stock is a reduced just because its price has dipped by 10%. Make sure you understand why and how that price is going torecover. Thus an investor must have enough information about that the company which gives assurance that future performance will be better than the current performance.
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Don't rely too much on analyst recommendations: Analysts' reports can offer some great information on the health of a business, but beware of the fact that theymay tend to be biased for 'buy' ratings. But because of that bias, a sell rating, especially a new sell rating, from an analyst can be a red flag. Keep an eye out for such calls.
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Don't be surprised by volatility: An individual stock is always going to be more volatile than a diversified mutual fund. An investor must get some perspective on how widely prices can swing within a year for the prospective company been considered for investment.
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Don't forget to sell: You should always have a plan for how you approach buying stocks, but it's also important to know when to sell. Have a set of criteria that will tell you it's time to sell, example if the company cuts its dividend; if the price rises or falls to a certain point; if an analyst downgrades the stock, etc. Having a plan to sellwill help you avoid selling out of panic over a short-term move in the market. A plan for selling can also help you take your gains.
Types of Stocks
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There are two main types of stocks, common stock and preferred stock.
Common Stock
Common shares represent ownership in a company and a claim (dividends) on a portion of profits. Investors get one vote per share to elect the board members, who oversee the major decisions made by management. When people talk about stocks they are usually referring to this type. In fact, the majority of stock is issued in this form.ÂÂ
Over the long term, common stock, by means of capital growth, yields higher returns than almost every other investment. This higher return comes at a cost since common stocks entail the most risk. If a company goes bankrupt and liquidates, the common shareholders will not receive money until the creditors, bondholders and preferred shareholders are paid.ÂÂ
Preferred Stock
Preferred stock represents some degree of ownership in a company but usually doesn't come with the same voting rights. (This may vary depending on the company.) With preferred shares, investors are usually guaranteed a fixed dividend. This is different fromcommon stock, which has variable dividends that are never guaranteed. Another advantageof preferred stock is that in the event of liquidation, preferred shareholders are paid off before the common shareholder (but still after debt holders). Preferred stock may also be callable, meaning that the company has the option to purchase the shares from shareholders at any time for any reason (usually for a premium).ÂÂ
Some people consider preferred stock to be more like debt than equity. A good way to think of these kinds of shares is to see them as being in between bonds and common shares.ÂÂ
Different Classes of Stock
Common and preferred stocks are the two main forms of stock; however, it's also possible for companies to customize different classes of stock in any way they prefer. The most common reason for this is where the company wants to keep the  voting power to a certain group of people. Here, different classes of shares are given different voting rights. For example, one class of shares would be held by a select group who are given ten votes per share while a second class would be issued to the majority of investors who are given one vote per share.ÂÂ
When there is more than one class of stock, the classes are traditionally designated as ClassA and Class B; however it is rare to find these classes of stock in Ghana.
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 ABOUT OMEGA CAPITAL
Omega Capital Limited is an Investment management, private equity and  investment advisory firm. The Company is authorized and regulated by the Securities and Exchange Commission of Ghana.
Contact Us
Analysts:
Kumapremereh Nketiah (JP)
Sophia Obeng-Aboagye
Omega Capital Research
No. 45 West Airport Road
Airport City
Airport Residential Area
Accra, Ghana.
Phone  ​ 233 302 734 744
Fax  ​ 233 302 734 745
Email  ​        [email protected]
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Website  ​www.omegacapital.com.gh
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Disclaimer
Additional information is available upon request. Information has been obtained from sources believed to be reliable but Omega Capital Limited  (“Omega Capital†or “The Firmâ€Â) do not warrant its completeness, accuracy or veracity. The firm is licensed and regulated by the Securities and Exchange Commission of Ghana (SEC). This material is for information purposes only and it is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The opinions and estimates herein do not take into account individual client circumstances, objectives, or needs and are not intended as recommendations of particular securities, financial instruments or strategies to particular clients. Periodic updates may be provided on companies/industries based on company specific developments or announcements, market conditions or any other publicly available information.
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