Dipping your toes into the stock market can be daunting, but many investors agree asking yourself these 3 questions can help set you up for the best chance to buy into successful shares on the ASX.
Starting out in investing can be both extremely rewarding and challenging. Every person and their dog will have an opinion on what's 'the next big thing', there are a host of different investing styles to choose between and there's never any guarantee of success.
But if you're here, I probably don't need to work to convince you that, no matter the challenges, investing can be immensely worthwhile.
There's a ton of ever-changing information on the thousands of companies listed on the ASX. It's one of the beauties of the beast – all the information professional market analysts use is available to the public.
I'm going to walk you through how to decide if an ASX listed company's shares are the best buy for you and your portfolio.
Before we get started…
No matter how well researched or how highly recommended an ASX share is, there is no guarantee that they will make a good buy. All investment decisions need to be made by yourself as an individual, based on your specific needs and circumstances. Take the time to determine your goals, abilities and investing strategy before you begin.
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3 things to check before deciding if an ASX share is right for you
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Does it have a strong foundation and good cash flow?
If you don't know what a company's earnings before interest, tax, depreciation and amortisation (EBITDA) and price-to-earnings ratio (P/E) are, start by getting a hold on their meanings.
Once you've got a grasp on them, have a look at these metrics in the company you're hoping to invest in. Many analysts believe these measures are one way to help predict growth.
You most likely want your ASX share of choice to have both a stable P/E and EBITDA. If you're an investor who doesn't want much risk, you probably also want to make sure that both have been consistently stable for some time.
This might be the quickest way to get a basic grasp on a company's financial status, with the understanding that these numbers can change.
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Do you believe in the growth potential of the industry?
There's more to investing in ASX listed companies than the company itself, which is why it's worth looking into the future of industry your ASX share of choice operates in.
Take scope of an industry, its strengths and its weaknesses, before investing in any company within it.
You (presumably) don't want to be among the people who invested in landlines, just as mobile phones were gaining traction. No market analyst worth their salt would be caught recommending even the strongest company in a risky industry.
Further, if you've done your homework and believe an industry is up and coming, that might be a sign an investment in a company within that industry is right for you. Those who invested in strong companies in the buy now, pay later and lithium sectors only a year ago are sure to be rejoicing now.
Don't forget, even the best investment is only as strong as the industry it falls into.
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Do you trust those who manage it?
Finally, take a look at who is managing the company. More than that though, look into their history, education and past endeavours.
If the CEO is brilliant but has never lasted more than 5 years in a role and they've been at the company for 4 years now, consider the possibility of a senior management shake-up in the near future.
Does the company's senior management have a history of making solid, strategic decisions? What sort of publicity — negative or positive — has the management team amassed? Are you comfortable with the skills of the people managing your potential investment?
Market analysts often take the people running a company into consideration when deciding whether it's an ASX share is a good buy. It's not the be-all measurement, but it's good to be aware of. Particularly if you're undecided on whether a company is the best ASX investment for you to buy into.
