If you have decided to invest in stocks, in order to make the most of your money and your choices, you need to educate yourself first. The Internet has many resources available to help you evaluate stocks and find ways to protect the money you earn. If you’re really committed to investing in stocks, it’s important to figure out which stock is worth buying; by ascertaining which ones are bad for investment you can also benefit, by using this knowledge to short sell stocks in order to profit from their depreciation in value.
Other questions to ask yourself when assessing which stocks you would like to invest in. Are you in it for speculative purposes, or do you intend to stay in the position for as long as it will take to grind out maximum profits? Knowing how long you intend to stay in a position will help you determine the factors to use for such an assessment. How much a risk are you willing to assume? Small-cap stocks are generally more volatile and carry a larger element of risk than blue chip stocks. But micro-cap stocks can also deliver greater returns (as well as losses) than blue chip stocks.
One strategy when it comes to investing in stocks is to buy an undervalued stock so as to make money from future appreciation in price, and using parameters such as the Price/Earnings ratio to determine which ones fit the profile. Investors should also study the companies they have interest in. Did a company set aside some of its earnings to invest in capacity building or in stock market expansion the previous year? This kind of investment works well for those looking at longer term opportunities.
Before you buy stocks, you have to do a little research on the companies you’re thinking of investing in. Pay attention to the following key components when you look at a company’s main financial statements (the income statement and the balance sheet):
- Earnings: Should be at least 10 percent higher than the previous year.
A great piece of advice is to trade stocks that you are familiar with and comfortable talking about. That’s not difficult in today’s consumer driven society. The most famous and popular brands that you use on a daily basis are often the large publicly traded international companies. These can be technology companies like Facebook, Twitter, Apple, Google and Yahoo. They can be retailers like Tesco, manufacturers like Toyota, banks like Goldman Sachs, beverage brands like Coca-cola, fashion houses like Louis Vuitton or conglomerates like Disney. The list goes on! By selecting brands that you know about, you automatically have an edge in the trading market and are more likely to understand the success of the company and the appeal among its consumers. There are a huge wealth of resources and news sites available where you can follow the latest stock news and reports. You then have to convert that information into a profitable trading decision. Let’s say for example that Apple has just announced the release of its new iPhone20 next month, the online media hype is high and the phone is expected to break sales record. A good stock trader will recognize the opportunity and trade on Apple’s stock price increasing.
- Sales: You’re looking for a number higher than the year before.
- Debt: This figure should be lower than or about the same as the year before, and lower than the company’s assets.
- Equity: This number should be higher than the year before.
Overall, assessing which stocks you should invest in is something you can get good at with practice and experience. Keeping informed every day about your portfolio, the financial markets, and the general economy, will keep you in the loop, ready to make the right choices. When it comes to choosing stocks, there are a few things you should remember:
– You’re not buying a stock; you’re buying a company. Invest in a stock is because the company is making a profit and you want to participate in its long-term success. Invest in stocks of profitable companies that sell goods and services that a growing number of people want.
– If you buy a stock when the company isn’t making a profit, you’re not investing — you’re speculating. A stock’s price is dependent on the company, which in turn is dependent on its environment, which includes its customer base, its industry, the general economy, and the political climate.
– Keep a tight control on your debt and finances. In turn, this practice will ease the pressure to invest aggressively with a short-term focus and help you focus more on the longer term instead.
– Be aware of investing tools. You can use stock screeners and other technical analysis tools to determine price movements of a stock before purchase.
– Ask yourself questions such as “Why are you investing in stocks?” and “Why are you investing in a particular stock?”…and answer them. Even if your philosophy is to buy and hold for the long term, continue to monitor your stocks and consider selling them if they’re not appreciating or if general economic conditions have changed.
Remember, stocks should never make up 100 percent of your assets. In some cases, stocks aren’t a good investment at all, but if you keep your money diversified broadly across stocks, ETFs, mutual funds, and hard assets, and keep adequate cash in the bank, you’ll be much safer in the long run. Your common sense and logic can be just as important in choosing a good stock as the advice of any investment expert.
Before you invest your hard-earned money in hopes of a profitable return, check out some financial ratios that can help indicate whether the company is on sound financial footing:
- Price-to-earnings ratio (P/E): For large cap stocks, the ratio should be under 20. For all kinds of stocks, it shouldn’t exceed 40.
- Price-to-sales ratio (PSR): This figure should be as close to 1 as possible.
- Return on equity (ROE): This should be going up by at least 10 percent per year.
- Earnings growth: You’re looking for at least 10 percent higher than the year before, and a rate that should be maintained over several years.
- Debt-to-asset ratio: This should be half of assets or less.