How to buy a stock?

When any of us go to Robinhood in hopes of buying a stock, the first incentive is which stock is gonna make the most money for me but we never consider long-term or short-term or even if the stock is worth its value right now. We mostly invest based on hearsay where since your friend or colleague is investing in something; you take their word for it and some news they tell you about the company. I did that for almost 2 years, I did not lose money but did not make a huge amount of returns either. Whereas some of the hedge funds claimed to make 50–100% returns. That made me wonder what is it that they know and we don’t. After digging up a lot of youtube lectures, reading books at a library and consulting with some college professors I got a good understanding of what is it that makes hedge funds so special. So here’s the basics that you might wanna consider before picking stocks.

In this article, I will be focusing on how to invest for long-term and ignoring any short-term news which I will cover some other time.






I will start off with an example where when I searched for Alphabet Inc stock, google provides this snippet. There are a lot of numbers here and what do they mean. Let’s break it down.

Golden Rule: Always find the undervalued stock

First is the price graph, where it lets you go back to the inception of this public offering. You should always check how the behavior has been for this over the past 10 years (we choose 10 years as a general rule of thumb). If the graph has been consistently going up or has it been flat or going up and down in a pattern.

If it has been going up consistently, chances are this stock could be overvalued as the price kept increasing but did the revenue/net profit/income/cash flow also increase, if so then is the current stock price matches the valuation of the company. In the example of GOOG, we see it increased consistently.

If it has been going up consistently, chances are this stock could be overvalued as the price kept increasing but did the revenue/net profit/income/cash flow also increase, if so then is the current stock price matches the valuation of the company.

Yes, the revenue went up but the net income was going up till 2016 and then in 2017 something happened and in 2018 it picked up again which means unless we can figure out what/why they had a slowdown in 2017 I would be skeptical about this stock.

But doing some deep analysis told us about the one-time tax google had to pay in accordance with U.S. Tax Cuts and Jobs Act, 2017. They had to pay $10 Billion due to which we see some dip. Also, another minor fees were for GDPR violation of $57 million. So this begs the question of how should I infer this from the numbers.

Some vocabulary that will help to understand the next section.
Operational Cost = Administrative Expenses + Salary +Cost of Goods + Depreciation of assets + R&D
Net Income = Revenue - Operation Cost - Income Tax - Interest
EBITDA = Revenue - Administrative Expenses - Salary - Cost of Goods



So, here we introduce the term EBITDA (Earnings Before Interest, Tax, Depreciation & Amortization) which just means earnings before factoring in all the other expenses because when we remove ITDA from earnings you would get a different picture for each company as the taxes change every year which could change how you measure a stock. EBITDA gives us more of an objective earnings analysis where things like tax, interest, and depreciation don't come into the picture and we get to know from this graph that GOOG had increasing EBITDA but because of one-time taxes they had to pay in 2017 the Net Income went down.

Recap : We saw revenue going up; net income going up except 2017 but we understood from EBITDA that it was due to some new taxes.

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