3 of the Most Important Questions to Ask Before Buying a Stock

Investors should be familiar with the fact that the stock market is arguably the best means of building significant wealth. It won't happen overnight, and it requires patience and discipline. But the rewards are worth it.

In the past decade, the S&P 500 index generated a total return of 283% (as of March 19). There are many companies, Amazon (NASDAQ: AMZN) being a great example, that have performed even better. So you might be interested in learning how to filter the sea of potential opportunities into a much smaller list that warrants further study.

Here are three of the most important questions that investors should ask before buying any stock.

Image source: The Motley Fool.

Do I understand how this business makes money?

Perhaps nothing in investing is as important as understanding how a company actually makes money. Take Amazon. It certainly generates sizable revenue from its retail operations. Online and physical stores combined brought in $89 billion in revenue in the fourth quarter of 2025.

Digital advertising is a budding division, reporting stellar 22% year-over-year revenue growth to $21 million during the fourth quarter.

There's Amazon Web Services. This is the company's dominant cloud computing platform, which registered a spectacular operating margin of 35% in 2025.

Amazon also makes money from its popular Prime memberships and other services. Subscription sales totaled $13 billion in Q4.

Is there an economic moat?

Amazon's incredible success over such a long period can partly be credited to its economic moat. An economic moat consists of a single durable competitive advantage or a combination of strengths that allows a business to outcompete rivals and discourage new industry entrants.

Amazon is an elite company because its online marketplace benefits from a network effect. Its cloud platform benefits from switching costs. Both of these segments also have cost advantages, as their scale supports efficiencies and profit generation. When it comes to intangible assets, Amazon's brand name and its ability to collect and leverage massive amounts of data can't be overlooked.

Many of the top-performing stocks possess a moat.

Is the stock's valuation attractive?

Another critical variable to consider before you think of buying a stock is the valuation. This is something that legendary investor Warren Buffett emphasizes, a strategy that has led to tremendous success for Berkshire Hathaway.

Investors want to avoid overpaying for a business, as elevated market expectations leave little room for error and introduce downside risk should financial targets not be met. Amazon presents an attractive opportunity today. Its shares trade at a 10-year-low price-to-earnings ratio of 28.9.

These three questions, related to understanding a company, identifying a moat, and dissecting the valuation, provide a valuable filter for investors during the early stages of the research process.

Neil Patel has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amazon and Berkshire Hathaway. The Motley Fool has a disclosure policy.