Spotting and Buying Undervalued Stocks

Money

Many businesses raise capital by selling shares of the company in the form of a stock certificate. When people buy stocks, what they are really buying is partial ownership of the company, along with the financial implications associated with ownership. These stocks are bought and sold on the public market, and the price of each share is determined by what people will pay for it at a particular moment in time. While the most universally accepted way to make money in the market is to hold stocks for the long term, many investors also believe you can make short-term gains by seeking out undervalued stocks. Finding these type of investments is relatively simple, and they can get you on the path to successful investing.

Instructions

1. Look for companies you know and like. The easiest way to start investing in the stock market is to explore companies you are familiar with and who make products you use in everyday life. Consider food and beverage companies, or clothing manufacturers.

2. Find the financial data for these companies. Any company whose stock is publicly traded must provide clear financial reporting to the public. This information can be found on the company's website (typically under a separate investment section) or on any financial data website such as Yahoo! Finance (see Resources below).

3. Calculate the P/E ratio for each firm you are considering. P/E, or Price-Earnings ratio, is a measure of the company's earnings in relation to stock price. It can be found by dividing the price per share by the company's annual earnings per share. A P/E ratio under 10 means that the stock is undervalued.

4. Evaluate earnings and growth potential. Once you've determined P/E ratio, it's time to take a common sense look at the stock. Does the company have a lot of room for growth in the form of new products or markets? Is the industry itself on the rise? A "yes" to either of these questions, accompanied by a low P/E ratio, is a good indication that the stock is undervalued.

5. Choose your stock. Once you've found a stock that's undervalued, it's time to make your purchase. This can be done through a traditional investment broker, or purchased online through an Internet platform such as Etrade (see Resources below).

Resources

• Yahoo! Finance
• Etrade