Investing in the stock market always comes with a risk. Just like any other investment, risk is always present on so many levels. To make sure that you do not invest in a losing company, you should be able to identify several red flags early on.
Companies, of course, would not so willingly wave those red flags for everyone to see. This is why proper research and identification of those red flags can help in your success in stock market investing.
There are a lot of such red flags, here are five of those red flags that you should definitely be on the lookout for.
Five Things To Avoid When Investing in the Stock Market
1. A sharp reversal of sales growth - a company that is experiencing a sharp reversal of its sales growth is considered as a red flag. This is why it is important to take a look at the historical data of a company, especially in their latest financial growth.
A sharp reversal of sales growth could mean distress inside the company, and it could signal an impending crash. Unless recovery measures are to be implemented by the company it is best to avoid investing in such for the time being.
2. Sharp growth in stock value - not that this is a bad thing, however, as an investor, while stock value goes up in a company it is best to avoid buying shares from it. Remember the basic rule in stock market investing, "Buy Low, Sell High."
You will not be able to sell your stocks at a high price if you have bought them at an already high price. It is best to wait or to look to invest in a different company with a lower stock value.
3. Very low share value - when we talk about a very low share value it means really low. Such value should have been the average value for at least a year to be considered a red flag. The reason why this is considered as a red flag is because it does not have the potential of increasing significantly in value anytime soon.
Such companies that have very low share value are those who are also susceptible to closing down, and these are usually from industries that are struggling regarding growth.
4. Market Saturation - if a company reaches its market saturation point, this constitutes a red flag. This means that the company has reached a point where there are no innovations on their products and have nothing new to sell to its customers.
This type of market saturation happens mostly to tech companies where innovation is among the main criteria for its success. Reaching the saturation point would mean clients will start looking at other brands and thus result in lower sales and decline in share value.
5. Shaky Company Portfolio - a simple research in the company history will yield several valuable information, such as the company's financial status and its history. A company that has changed its name several times and with a poor financial performance could be a red flag.
A company marred by controversies and scandals also constitutes a shaky company portfolio. Investors tend to move away from a company involved in scandalous or unscrupulous transactions.
Arming yourself with the right knowledge about a company and identifying any potential red flags will help you avoid investing in the wrong company. It could help in reducing the risk of losing your money in an instant.