Ten Questions That You Should Ask Prior to Purchasing a Stock

The first thing that you should understand is how the company earns money. Just because everyone else is buying the stock and the price has run up tremendously does not mean that you should also be jumping on the band wagon. I suggest that you review the annual report to see the statement of cash flow. Are net earnings increasing while cash is declining? This could be a warning sign that the company could be manipulating the net income. Every company earns money differently. If you don't review the financial reports you may not understand the industry that the company is operating in. For example, when you hear the name General Motors you may immediately conclude that their earnings are tied to the auto industry. However, a closer examination of their financial report will reveal that over 50% of the company profits come from GMAC financing. This wholly owned subsid iary earns money by lending in the financial markets. Therefore, the earnings of GM are tied more closely to the banking industry.