How to Select Stocks

Many people are ready to start investing their money in the stock market but don’t have any idea how to choose stocks to buy. It can be an extremely overwhelming task, considering the fact that there is risk involved. Playing the stock market can be a very frightening endeavor when you do not know how to pick your investments. This deters many people from ever even trying. Here are some useful tips to consider when selecting stocks.

Instructions

1. Find out the sources of a company’s revenue. You need to find out how a company makes money in order to determine the likelihood of its ability to continue earning at the same level or increase cash flow as opposed to losing money. Does the company distribute to other vendors? If so, how are the other vendors doing financially? Does the company sell directly to the suppliers? Knowing the answers to these questions will help you determine how the company really shapes up financially.

2. Discover how much money the business is earning. You need to know how much the business is making in order to know if it is likely to be a solid investment. It is just as important that the earnings are steady and consistent as it is that they are large. A business that is steady is less risky than one with revenue that spikes and plummets.

3. Ask yourself whether the business can maintain their earning power over time. How competitive is this line of business? How much does it cost to operate the business? The answers to these questions will give you distinct clues about the future of the company.

4. Consider the company’s management. Is the management team honest and consistent in releasing financial data about the company? Are management’s policies share-holder friendly? These aspects of the business lend itself to the company’s success.

5. Evaluate the price of the shares. You need to determine whether or not the share price is fair by evaluating the price per share against the annual profits for the company. Do the math. Once you know how much the company profits each year, you will be able to determine what percentage of this number each share is worth. The higher the percentage, the better the value.

Tips & Warnings

• Look to a professional stockbroker for advice.