How to Research Stocks to Buy
One of the most important parts of 'playing the market' is researching companies.
- Difficulty:
- Moderately challenging
Instructions
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1
Obtain corporate financial statements filed with the Securities and Exchange Commission. You can get such documents without charge via www.freeedgar.com.
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2
Analyze quarterly statements covering two or three years, noting trends in earnings per share and revenue.
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3
Look for a trend of consistent growth in earnings per share.
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4
Calculate the company's price-earnings (PE) ratio, a measure of a stock's value. (Divide the stock price by annual earnings per share.)
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5
Compare the PE ratio with industry norms and with the S&P 500's ratio. The lower the ratio, the less expensive the stock is relative to earnings.
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6
Beware of debt. Check out the company's balance sheet, looking for the extent of its long-term debt.
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7
Check cash flow - the movement of cash through the company. You'll want the company to have positive cash flow.
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1
Tips & Warnings
Make sure the company isn't giving short shrift to its research and development budget.
Calculate a sales-per-employee figure and compare the company with its competitors.
Assess management. Find out where managers worked before they joined the company by reading proxy statements, registration statements and annual reports.
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Comments
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Nov 22, 2005
It used to be that only full service brokers had access to detailed information on stocks. Using the internet, we all have access to almost limitless information about a stock and company. With a little patience and practive, you can find "your" most useful sites on the web. Use multiple sites to compare the same stock to see if things "add up" on a company. -
Nov 22, 2005
If you can't take the time or don't have an interest in going into such depth, then find someone who does and can. It can be a friend or a stockbroker, but check to see how well he or she does with his or her own investments, too.
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Nov 22, 2005
There are many free websites available to investors to assist them in evaluating a stock. I follow many of the rules already listed. In addition, I like to start out with the list of top percent gainers on that day, as those stocks may well turn out to be great investments long-term. I prefer stocks with positive earnings and revenue growth the latest quarter without any excuses. Morningstar is well-known for mutual fund evaluations with their star-rating, but they do a superb job in evaluating stocks as well. And much of that site is free and available to the public. For more information you might wish to subscribe. Look for persistence in revenue growth and earnings growth as well as free cash flow growth and a solid balance sheet.
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Nov 22, 2005
If you can't take the time or don't have an interest in going into such depth, then find someone who does and can. It can be a friend or a stockbroker, but check to see how well he or she does with his or her own investments, too.
-
Nov 22, 2005
It used to be that only full service brokers had access to detailed information on stocks. Using the internet, we all have access to almost limitless information about a stock and company. With a little patience and practive, you can find "your" most useful sites on the web. Use multiple sites to compare the same stock to see if things "add up" on a company.
