How to Develop and Analyze an Investment
It's your money - maximize its value by developing and analyzing your own investment profile.
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Things You'll Need
- Access to the internet (or other information source)
- An investment account
Instructions
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First, you must determine your objectives and your tolerance for risk. For the rest of this article we'll assume that your risk tolerance is 'moderate.'
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Next, pick an 'industry' that you know something about. Do you like to shop? Then maybe an investment in the 'retail' industry is for you. Do you travel abroad? Then maybe an international investment fund would suit your needs. If you find something that interests you, investing will be a lot more fun, and will likely prove to be more profitable.
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Based on your risk profile and 'industry' selection, you should make your selection based on a few criteria, including current income (ie a dividend) and capital appreciation. Capital gains are taxed at a lower rate than current income (thanks 43), so if your situation allows for it you are better off if you generate capital gains.
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Now that you've developed your investment themes and ideas, one of the best metrics to analyze your investment is the price of the stock or fund relative to its earnings (or P/E). The P/E ratio should be in line with the projected growth rate. If the P/E is below the growth rate (ie if the p/e is 30 and the company / fund will grow at 50% per year), then it may be time to buy. The inverse is true as well. Yahoo Finance does a lot of the work for you and presents P/E ratios along with expected growth rates.
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Tips & Warnings
Never buy a stock on a tip - you will end up with less frieds.
Try to avoid multiple trades. A buy and hold strategy will maximize your gains by minimizing fees and expenses.
Don't invest all of your money into one stock or one fund - diversification is essential to long term value creation.
Be patient. Markets and companies have their ups and downs. Focus on the long term prospects of the company or industry.
