Purchasing a stock is a process that should occur only after thorough research of both the individual company as well as your personal financial goals. As a financial professional, I find that many investors have some very poor reasons for why they are purchasing a stock. I like to ask people why they are buying a particular stock, and I fully believe that if you can’t give a solid explanation for why you are making that purchase, you shouldn’t be buying the stock at all. What are some good reasons to buy a stock? Let’s take a look at four high quality reasons to purchase a stock.
Four Good Reasons to Buy a Stock
1. The Company Has a Strong Competitive Advantage- In my opinion this is the single best reason to buy a stock. Warren Buffett is famous for talking about “economic moat.” Economic moat is best defined as the continuing competitive advantage one company has over others in the same industry. A company that is able to develop this kind of advantage is in a very strong place financially. If this is your reason for buying the stock, make sure this advantage is something that can be continued in the years to come.
2. Attractive Valuation- There is no doubt that valuation should play a role in the stock purchases you make. Sometimes a company can become undervalued by the market because of outside forces they simply can’t control, which can present a buying opportunity. This is especially true for mature companies who are a trading at a discount to historical valuations.
3. A Strong Balance Sheet- Just as your personal financial position is vital to your family’s well-being, a company’s balance sheet is crucial to their ability to bring returns to shareholders. A company that has a balance sheet full of cash and other assets will be far more likely to be able to take advantage of opportunities that come about. As they take advantage of these opportunities it is likely that the price of their stock will increase.
4. Growth Opportunities- In the end it is all about growing earnings for corporations, so you’ll definitely want to look for a stock that has growth potential. Does the company have ideas that could take their particular industry by storm? If so, this may be a good investment for the long run. It is important for companies to stay ahead of the curve, so make sure you are buying stock in companies that are innovative.