Here are 9 questions to ask before buying a stock.

  1. What is good about this company?
  2. What are the risks associated with this company?
  3. What is the likelihood of each risk coming true? If so, what are the consequences of it?
  4. What is the company doing to mitigate these risks?
  5. What does the future of the company look like?
  6. Does the management possess integrity, honesty and intelligence?
  7. What is the intrinsic value of this company?
  8. How much of a discount is the company currently selling for?
  9. How do I know I am correct in my assessment? What evidence do I have to backup my answers?

The answers to questions 1 through 6 can be found in the annual reports. You should probably read annual reports of the past 3 to 5 years to get a clearer picture of the company. It will tell you a lot about the future of the company, risks associated, and management’s ability.

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Answers to questions 7 and 8 will require you to do some math. There is no one way to calculate a company’s intrinsic value. Googling “How to calculate a company’s intrinsic value” will give you plenty of ideas. Research a few, and use multiple methods to see if the answer is within the same ballpark.

In my experience there are three reasons people will lose money in the stock market.

  • Lack of extensive research
  • Gut feeling so strong investor loses any objectivity
  • Arrogance – It is correct because I say so.

While questions 1-8 are about extensive research, question 9 is about eliminating arrogance and gut feelings you have about a stock. It’s about ensuring you have actual evidence to backup your gut feelings, and make an informed decision.

Hope this helps.