BEWARE OF THESE INVESTING BAITS
Value investing is the process of determining company stocks with positive growth outlook and profitability while having a low valuation, trading just below their intrinsic financial worth. However in this field, many investors have fallen in what is called as value traps, or those that will lure you into thinking that stocks are relatively undervalued when in reality it is not. Instead, prices are constantly falling due to specific conflicts that may cause you long-term problems rather than a temporary blow.
While an affordable cost may be tempting to plunge into, it is crucial to look beyond the numbers and assess a firm’s qualitative foundations as well, in order to save yourself and your pockets from draining. Here are a few warning signals that a stock is not an opportunity and is better to be left alone.
Blurry business strategy
Regardless of how appealing figures may be and how promising statements are, a company with an unclear target in terms of a business model is something to be suspicious of, since a healthy one should be able to simplify their goals and measures to become profitable. Be watchful of those with outdated technology as well, because this is an indicator of its inability to cope with modern methods of service that will result to a continuous slump.
Excessively cheap cost compared to earnings
The price-to-earnings ratio is one of the most reliable gauge signifying whether a stock is a bargain or not. If the price has fallen to an unreasonable level relative to its return, this is a clear evidence of instability.
Mountain of debt
A business that is rapidly edging towards bankruptcy because of too much debt will have a remarkably larger interest rate if revenue declined--something that will make management increasingly difficult. An overwhelming amount of deficit leaves little room for even the slightest of setbacks in the market, hence it would be wiser to avoid investing in it.
Nonexistent edge over rivals
Given the tight competition in the marketplace, every firm should have its distinct quality that helps it advance beyond its peers. A competitive advantage is a must, be it in their products, brand, suppliers, and production. If the one you’re eyeing on does not possess anything that can help it standout among the rest, it would be best to let it go and look for another one instead.
Insider buying shortage
Lack of insider purchase is an instant caution for every investor deliberating on laying out his money on a company, especially if selling within is also present. This is because if they are not eager to lift shares for a cheaper price, it cannot be considered a bargain.
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