Investing in the stock market today, you should not view these as mere shares, but rather understand that when you buy stocks, you are buying a part of a company. To make sure your shares will continue to increase in time, you need to focus on looking at the financial analysis of the company. By looking through the balance sheets of a company, you will be able to identify any problems or see areas of great potential. Financial statements are done by professionals who use ratios taken from reports and financial statements.

Financial analysis will show a company’s profitability, solvency, liquidity and stability. The profitability of the company will determine the company’s ability to earn income and show its growth potential at present, and in the future. This is important for you as an investor. If the company shows negative growth, your stock price may decline, creating losses for you.

The solvency is the company’s ability to pay off any outstanding debts in the long term. Again, if your stock pick is a company with massive debt and negative earnings, you would want to reconsider investing in the company, because it could go bankrupt. Unless there is a clear strategy that will turn the company around, you should avoid it.

You should also take a look at a company’s liquidity, which allows it to maintain a positive cash flow, even after it pays off any obligations. Lastly, take a look at the overall stability of the company. The stability will determine the company’s possibilities to stay in business in the long-term, without taking continuous losses. Financial analysis will use balance sheets, income statements and other financial and non financial indicators.

Before you put your hard earned money in a stock, it is important to look through the financial analysis and see what the conclusion is on the company. Many investors trading stocks do not take the time to research the companies they invest in. They simply assume that stock picking shares that are down from their highs are good buys.  You should also perform other analysis like fundamental and technical analysis on the stock. This will provide you with information on how a stock will move on the stock market. There are many other indicators that you can use to get more information on how a stock may behave. Always play it cautious and do not jump in just because others are doing so. Always look beyond the share price.