How to Determine the Best Stocks to Buy. While in the long-term, stocks can prove to be a wise choice, the short-term can be a bit a of financial roller coaster ride. To minimize the up and downs of the investment ride an investor can establish a criteria to determine the best stock to buy.
Establish your risk aversion level. A person is very risk averse if they prefer very stable stock that may not grow at a significant rate. Conversely, an investor with a low risk aversion level will prefer to invest in stocks that could drop significantly in value but have the potential for a large return on the investment.
Ascertain your time horizon for the stock investment. The closer you are to retirement, the shorter your time horizon. The longer your time horizon, the more risk you can tolerate in your stock of choice.
Use financial measurements as the means to rate each stock. Some examples of financial measurements are dividend yield, earning per share, revenue growth, debt to asset ratio, and gross profit margin. Whichever measure you choose to rate each stock, make sure that you understand how each one relates to the value of a stock.
Analyze each sector to determine which one has the best growth potential. For example, during the Internet stock boom of the 1990's the technology sector experienced tremendous growth. However, it also crashed during the major market correction. Therefore, you should understand that a sectors outlook could change quickly.
Rank each potential stock based on the previous four steps to determine the best to buy.