What You Need To Know Before Investing In Companies On The ASX

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Last Updated April 15th 2023
4 Min Read

Evaluating your investment objectives and risks is essential before putting money into the market. Your age and the investment timeframe may influence investment choices. 

You'll therefore need a full-service broker who can provide an overview of your financial status and help set workable financial goals.

According to the Australian Stock Report, about a third of Australians own listed investments such as bonds, hybrids, managed funds, warrants, shares, options, EFTs, or futures, which explains why you need to invest in ASX. 

The first step for many investors is to purchase stock. In Australia, companies listed on the Australian Stock Exchange about 2,200 from different industries. 

This article will walk you through what you need to know before investing in companies on the ASX. 

Factors You Must Consider Before Investing in ASX Companies

1. Consider the Company’s Current Financial Health

The biggest mistake you can make is choosing a company to invest in without carefully reviewing its financials. 

Check the financial books of the company you'd like to invest in to see if it has solid financial records that can back its success. 

Ideally, you'd want to see the balance sheets, sales journal, and general ledger, among others. Below are other things you should keep an eye on: 

Income Statement

A company's cash flow is its total cash inflow minus its total cash outflow. It is important to think about how a company’s income and cash flow may affect your possible investments.  

Examine the company's operating cash flow first, as this metric is regarded widely as the most indicative of its potential to create cash. A great way to consider cashflow is by comparing the company’s performance on the Australian stock report. If the company's cash flow is negative, the business will likely not survive through economic challenges. 

Although income statements consider non-cash expenses, operational cash flow is frequently a more reliable indicator of a company's ability to generate revenue than net income.


Costs such as research and innovation are non-cash outlays, and companies often use earnings as a stand-in for cash flow to report financial results. A significant disparity between the two indicates that the company's financial statements are potentially misleading. 

One crucial indicator is the earnings per share (EPS), which measures how much money a company makes from selling one piece of stock instead of another. A declining EPS suggests that the organization is having financial difficulties. For this reason, you need to carefully check if earnings per share are increasing consistently or fluctuating widely.


Equity refers to the capital invested without the investor expecting a return. It indicates the level of confidence investors have in a company. That said, a lot of equity indicates a financially healthy company. 

The size of an organization's equity pool reflects the confidence and enthusiasm with which investors see the company's prospects. If a business' equity is growing and is profitable, it has a good chance of lasting an extended period.


A firm's debt is a proxy for the total of its financial obligations. Debt is a standard method of financing for businesses, but carrying too much of it can be risky. 

Factors to consider when evaluating a company with debt for investment are the interest rates on the loans and how long the loans will take to mature.


A business may be losing money or experiencing a period of negative cash flow, which endangers it to financial borrowing opportunities. A company's health might be seen as marginally better if it is highly likely to access financing. 

2. Look at Any Regulatory Issues

The Reserve Bank of Australia and the Australian Securities and Investments Commission (ASIC) are two of the many independent government agencies that work together to create the highly regulated environment in which businesses in Australia must function (RBA).

General worldwide rules for the regulation and conduct of clearing and settlement facilities are guidelines developed by the Committee on Payments and Market Infrastructures (CPMI) and the Technical Committee of the International Organization of Securities Commissions (IOSCO). 

Many foreign authorities have granted ASX permission to conduct trading or to operate a market. To keep that permission, ASX must adhere to the regulations set forth by those foreign authorities.

3. Look at the Company’s Industry and Competition

A study of a market's competitive landscape, such as Porter's Five Forces Analysis, is a valuable resource for business strategists. The analysis runs on the idea that differences in industry structure account for observed differences in profit margins.

The primary goal of the Five Forces framework is to analyze the market's appeal. But, the study also serves as a jumping-off point for developing strategy and comprehending the competitive environment in which the business competes.

  • Intense competition between existing enterprises in a sector lowers the possibility of profit for all firms.
  • Competition from similar items or services means you can only lower your rates.
  • Customers' ability to negotiate discounts and other price reductions
  • Suppliers' ability to set pricing and cap your profits can be a deal breaker.
  • New competitors are discouraged by barriers to entry (the threat of new entrants).

The sum of these forces' strengths sets the industry's profit potential. Profitability is a factor evaluated in terms of the rate of return on one's money over time. 

4. Look at the Company’s Potential Risks and Challenges

There is always the possibility of loss with any investment. When purchasing securities like mutual funds, stocks, or bonds, you should be aware of the risk of experiencing a loss. Money invested in securities in Australia is often not federally insured, except for investments at FCS-insured credit unions and banks. 

Your first investment, or "principal," is at risk. That is the case even if you use a financial institution to purchase investments. It is, therefore, essential to research risks the company has encountered or may face in the future, how they dealt with them, and measures to help them get through them. 

5. Consider Any Potential Conflicts of Interest

You should talk to a market professional about potential conflicts of interest to make a well-informed choice. Conflicts of interest may be financial, conflict of roles, or non-financial (relations or legal).

When acting as a stockbroker, clearing and settlement service, financial services licensee, and benchmark administrator, ASX have safeguards to prevent any potential conflicts of interest, including any interests and contacts, from improperly influencing decisions.

6. Review the Company’s Corporate Governance

Australian corporate governance is a system influenced by a complex system of laws, "soft law," and public expectations. Good corporate governance attracts investors. The parties that contribute to good corporate governance are the management team, the board of directors, and the shareholders. 

Stockholders, boards of directors, administrators, and employees all have their interests aligned when good corporate governance is in place. Good corporate governance strengthens trust in investors, the public, and the government.

Bottom Line

ASX's investment products can help traders reach their financial objectives when appropriately used. It's vital to get expert guidance before determining how to invest, as the strategy that's best for you will vary based on your preference.

You should consult an investment adviser who either directly holds or represents an Australian Financial Services (AFS). The broker should understand your investment aims and the risks involved. 

Your financial adviser should be well-versed in the solutions they're recommending, willing to explain how well those investments meet your goals, and committed to checking up on them.

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