Small investors often buy stock because they have a good experience with the company. This makes perfect sense, but make sure to ask yourself what it is you like: Is it the product or the service? Or something less bankable, such as the image of the brand? Going with your gut without doing your homework can lose you money in a hurry.
What to do: Image counts, but price and valuation matter more, says Brian Gendreau, market strategist for Cetera Financial Group. “Investors who buy stocks without regard to price often find themselves with dead money for years to come.”
Gendreau suggests you check out the price-earnings ratio, or P/E, one of the main metrics analysts use to compare values between companies. Many financial sites (including CNBC.com) calculate the P/E ratio for you, but you can do it yourself by dividing a stock’s current share price by its earnings per share.
If the number is high relative to other stocks in the same sector (like retail or technology), what you’re buying may be too expensive, relative to other companies.