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Aug 25, 2025

The ABCs of Investing

by Canadian MoneySaver

So, you've got your eye on a stock. Maybe it's a company you use every day, one you've seen in the news, or a tip you picked up from a friend. Before you hit that “buy” button, take a breath. Investing isn’t gambling—it’s a thoughtful process. But that doesn’t mean it needs to be complicated. 

When considering your next stock purchase, think about The ABCs of Investing: a simple, practical framework for making smarter investment decisions. 

A: Analyze the Business 

The first step is to understand what you're buying. When you purchase a stock, you're buying a piece of a real company—so ask yourself: What does this business do? 

Consider: 

  • Business Model: How does the company make money? Is it a product-based business, service-oriented, or a mix? Do they rely on subscriptions, advertising, manufacturing, or one-off sales? 

  • Industry and Market: Is the company in a growing industry like renewable energy or artificial intelligence (AI), or a mature one like utilities or consumer goods? What kind of competition does it face? 

  • Leadership: Who runs the company? Check out the CEO and management team—are they experienced, innovative, or scandal-prone? 

  • Brand Strength: Does the company have loyal customers or a strong brand identity? 

Try reading the company’s most recent annual, quarterly reports and investor presentations. If the business model doesn’t make sense to you after a bit of reading, that’s a red flag. Warren Buffett famously says he only invests in companies he understands. While you might not need to know the ins and outs of “how the sausage is made”, what the company does, how they do it, and where they are trying to go should be fairly clear. 

B: Balance Sheet and Financials 

Next, dive into the numbers. This is where you separate excitement from reality. 

Key financials to check: 

  • Revenue Growth: Is the company growing steadily, or are sales flat or declining? Why? 

  • Profitability: Are they making money, or just burning through cash? Look at net income and operating margins. 

  • Debt Levels: How much debt is on the books? A little debt can be normal, but too much can sink a company when the economy turns. 

  • Cash Flow: Is the company generating operating cash flow and free cash flow—real money it can use to pay dividends, invest in growth, or pay down debt? 

  • Compare to Competitors: If the company is in a similar industry but has much lower margins or higher debt, this can be something to examine further. 

You don’t need to be an accountant to get a basic sense of financial health. Free tools like Yahoo Finance or Google Finance offer simplified snapshots and key metrics but aren’t perfect. Utilize multiple resources and cross-check different sources as data can be different. 5i Research offers a free trial and can be a great resource as well, offering research reports and a question-and-answer tool with a database of thousands of past questions already answered.  

C: Context 

Even the best company can be a bad investment if you overpay. 

This step is about understanding valuation—what are you paying relative to what the company is worth? 

Consider: 

  • Price-to-Earnings (P/E) Ratio: This tells you how expensive the stock is relative to its earnings. Compare it to similar companies, and the market average. 

Price-to-sales (P/S) and Price-to-Book (P/B) ratios can also help depending on the industry. 

  • Growth Expectations: A high P/E might be fine if the company is growing fast. But if it's not, you may be paying too much for too little. 

  • Dividend Yield: If the stock pays a dividend, is it sustainable? Or is the company borrowing to pay shareholders? 

And don’t forget your context: 

  • Are you buying this stock as a long-term investment or a short-term trade? 

  • Does it fit your risk tolerance and investment goals? 

  • What percentage of your portfolio would it make up?  

Final Thoughts 

Investing doesn’t have to be overwhelming. The ABCs offer a solid foundation to evaluate any stock. It’s not fool proof, but it will help you avoid chasing trends and instead focus on what matters: buying quality companies at reasonable prices. 

So next time a stock catches your eye, take a step back and go through the ABCs. Your future self, and your portfolio, will thank you.