Every now and then someone contacts me asking if I would recommend buying a certain stock. My answer usually is that you are asking the wrong question. Here’s why.
Over a hundred thousand companies are listed on different stock markets around the world. Collectively, these companies represent trillions of dollars of economic activity in every sector. On any given day, you will be offered opportunities that can enrich you or ruin you. As an investor, your goal should be to find the best investment. Can you find the best investment if you are looking at only one company in a hundred thousand?
Every stock is a share in a business. Before buying a coffee shop, you would look at the earning potential of the business. Does that location or brand attract customers? Is the product appealing to consumers? Is it priced for success in the market? Can the revenue pay for rent, utilities, and wages? When buying a business, you would ask many questions to figure out whether the investment is a risk worth taking. You need to do the same for stocks. Study those businesses before investing in them.
How do you study businesses listed in the stock market? Read their financial statements. Read the annual reports. Research their market and strategy. The more you know, the better you will be able to evaluate whether the business will be profitable. Studying individual businesses takes a very long time and most of us don’t enjoy working with numbers. This is not feasible for most of us.
You also have the choice of buying the market. Suppose you are convinced that Marijuana sector will experience phenomenal growth and have no objection to investing in this sector. You think the market will grow but you don’t know which company will be the most profitable. Then you can buy the market with a marijuana fund (HMMJ). With this fund, you are buying cannabis grower, distributors, retailers, and all kinds of suppliers for this industry. Although you will not cash in enormous profits you could have by picking the winner but you also won’t risk losing all you money by picking a loser. Your investment will grow of suffer with the market. You also have the option of buying funds that offer exposure to entire Canadian market, American market, or even the global market.
Should you buy this stock? No because you haven’t done proper research and you are more likely to lose money. However, you can buy the market. It is easy to lose money in the stock market. When you buy the market, you reduce your risk. Start with index funds and you can start picking individual stocks when you have acquired the skills to evaluate businesses.
