The 7-Step Investment Formula: Your Complete Guide to Smart Stock Investing
Master the art of stock investing with this comprehensive 7-step formula that minimizes risk and maximizes your chances of profit
The 7-Step Investment Formula: Your Complete Guide to Smart Stock Investing
Investing is a job that should be done very carefully to minimize your risk. You must have seen the title and asked, what exactly are these steps? In this blog I will teach you these 7 steps to take before investing in a stock to have a higher chance of profit with each deal.
📊 Investment Checklist Tracker
Progress: 0/7 steps completed
Step 1: Is the Company Growing? 📈
Look at the company’s past 5 to 10 years and ask:
- Is it growing up each year?
- Is net profit growing steadily?
- Is cash flow from operations growing too?
✅ Look for consistent year-over-year growth in revenue, profit, and cash flow
Step 2: Is It Still Growing? 🚀
Now check if it is still growing today and in the future:
- Is it expected to keep growing?
If it is yes as of analysts, then that means it has potential in the future.
Step 3: Does It Have an Economic Moat? 🏰
An economic moat means a strong advantage that it has over other companies:
🏆 Brand Power
Is it a popular brand that people trust?
🔒 Switching Costs
Hard for people to switch from that product
📈 Network Effects
Gets better as more people use it
💪 Scale Advantage
Is it very big so it can make things cheaper than others?
Step 4: Is It Profitable and Efficient? 💰
📊 Profitability Calculator
Key Metrics:
-
ROE (Return on Equity): ROE tells us how much profit the company makes using the money invested by shareholders. This should be 12% or more.
-
ROIC (Return on Invested Capital): ROIC shows how much profit it is making for all the money they have for the business (not just from shareholders but also borrowed money like loans). This should also be 12% or more.
-
CCC (Cash Conversion Cycle): This shows how much time it takes the company to make money from its inventory. This should be short, around 30-40 days.
Step 5: Is Debt Under Control? 🏦
🔍 Debt Health Checklist:
- ✅ Current Ratio: Company has enough assets to pay short-term bills
- ✅ Debt: The debt should not be 3 times more than the company's earnings
- ✅ Interest Payments: < 30% of cash flow - The company shouldn't pay too much on interest
Step 6: Is the Price Cheap or Fair? 💵
Use these valuation tools:
DCF
Discounted Cash Flow
P/E
Price to Earnings
P/S
Price to Sales
P/B
Price to Book
Step 7: Is This a Good Time to Buy? ⏰
📈 Market Timing Checklist:
Is the stock on an uptrend?
Look for overall upward price movement
You buy when it is pulling back or taking a dip
Buy during temporary price corrections
Don't buy at the top when it reaches support level
Avoid buying at peak prices
Use moving averages like 50-day and 200-day to track trends
Technical indicators help confirm trends
🎯 Bonus Tip: Don’t Buy All at Once
Don’t invest your full amount in one go
Split it into 3 or 4 parts. This strategy is called Dollar Cost Averaging and helps reduce risk.
📋 Final Investment Checklist
Before buying any stock, ask:
Is the company growing every year?
Is it expected to keep growing?
Does it have a strong "moat" to protect itself from competitors?
Is it making good profits and managing money well?
Is it using little or safe debt?
Is the price fair or cheap?
Is now a good time to enter, based on the chart?
🎉 Final Words
Follow these 7 steps, and you’ll become a smarter, safer investor. Remember, successful investing is about patience, research, and disciplined decision-making. Never rush into investments, and always do your homework first!