How to Valuate a Stock like Buying a Business

Post written by Sherin Dev. Follow me on TwitterMajor task of a right stock market investor, especially value investor, is the valuation of stocks. There are thousands of methods available to evaluate a stock or a business to identify the best in it before taking an investment decision. For an ordinary investor, valuation is not so easy as it pronounces. Most of the stock investors or emerging investors feels stock valuation required high knowledge in numerical. It is just a myth. If you study the approach and characters of world famous investors, you could find none of them have above average numerical skills to evaluate the stocks or a business to invest. Great investor Warren Buffett can be a best example on this.

There are multiple stages to get knowledge. It begins with our school and collage study. Next level is from our experiences and final level is from the life itself. These rules are highly applicable to stock investors too. There is no investor in this world that is ahead of any mistakes or errors with their selection or investments. Success of these investors totally lies on how they avoid the same mistake not happening again to them in the rest of their investing career. In this sense, mistakes are the best tools to learn real investment and reach to maximum success.

This article highly intend to ordinary investors who have basic skills and average with numerical. Of course, numerical skills required to an extent, but not to an expert level. An ordinary investor can select a right stock same like buying a new business. It is so easy to understand and simple to apply.Suppose you are looking for a good business to buy in your locale and receives an offer from a local business owner to buy his business. If you don’t have any interest on his business, you will certainly reject that offer. But if you have interest, you will proceed with further. Whether buying or not, you will approach him to know more about the business to understand whether it is suitable to your interest or not. the next step would be preparing a set of questions to ask to the present owner to identify how much this business meets your requirements. Below are some of the important questions if I might be the person there to buy the business.1. When did you start this business and what is your product or service?2. How familiar and comfortable the public is, with your product or service?3. What was the total capital employed to start this business and what is its present status?4. How many owners or stake holders involved into this business?5. Do you have any loans or other debts? If yes, from where and how much?6. Who all are your immediate competitors in the area doing same business?7. What is their market share compare with your business?8. What is the profit you have received from the beginning year till today?9. Does your business have any kind of legal issues or judicial cases against?10. How qualifies and efficient your employees are?11. What you have done to market your products or service?12. What is the real cost associated to manufacture each product and what would be the real profit if sell the same?13. Why do you want to sell the business now?Of course the above are 12 simple questions anyone can easily ask to a business owner who presently want to sell his business to you. it is not highly complicated questions or not required much efforts to prepared. Only common sense required to ask these questions because each of the answers to these questions either makes you close to buy the business or take away from the buying decisions. Another truth is, you will get answers to these questions. But it is your duty to confirm the received information are true. Slightly complicated areas like profit and spending areas that can cover using your average numerical skills.If you are a real buyer, what would you do after getting answers to all these questions? You may buy or may not buy. Why? there would be some solid information about the company that may support your decision or take away from the decisions. If you are able to identify the same easily, then why don’t apply the same skills to evaluate a stock or business to invest. It is so easy isn’t it?

Answers to the above questions pointing its fingers to some of the best information about the company as follows:

First question points its finger to the reputation of the company. How old it is and how established it is in the market. Second question is to understand how popular the product or services to the people or markets. Third is to get information about its total worth or assets. Fourth, information of its stake holders and how much each of them holding. Fifth, is the company suffering from debt or has any debt that is unmanageable. Sixth gives information about the competitors. Seventh is to understand the monopolistic position of the company. Eighth, year to year profit growth and thus earnings growth. Ninth, understand legal issues against companies that may lead to shutdown or lead to bankruptcy. Tenth is to the managerial efficiency of the company and work force capacity. Eleventh, company network information to promote the product. Next, identifying the capability of surviving bad situations like economic recessions and related business bottlenecks and finally, understanding any critical possible situations that may drag the company out business or total lose.I still wonder, why don’t people able to pick right stocks or businesses to invest by asking these questions against them? It is so easy to identify if one spend little time to research. All the information about these questions are easily available from the company websites or stock exchange sites where companies filing their information. Along with collecting such highly useful information, add little commonsense to confirm the suitability of a stock or business for you to invest.In this article, I have given an idea to only identify the stock. There are various article available in the data base of this blog to give you knowledge to understand the right time to buy or sell. I have simplified the buying information of a business with number of articles and you can easily collect them by clicking on the label named ‘investment’ under this blog.Now it is your turn. I have given an idea and shared some experience from life on that idea to make you understandable how I am picking the stocks. I have also given the idea to you to improve much better than me and take better decisions than me by using your own sense. If you like this article, leave a note under this article and that would be helpful to me to understand how people valuating my blog post and how they feels on my ideas and experiences.

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