How to Determine the Best Stocks to Buy Now
Since the stock market crash, you may be wondering about what are the best stocks to buy now. There is one simple rule however that has worked over and over for long term investors. It is the same method that Warren Buffet used to be the most successful investor in history: value investing. The technique is simple, but it is powerful. Value investing is the cornerstone of any portfolio that is successful over the long term.
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Instructions
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You must first understanding the idea of value in regard to stocks. Simply put, value investing allows you to find stocks that are being sold for a bargain compared to the amount of money that the company makes. Obviously, the best stocks to buy, during a recession or during a bull market, are the ones that are being sold for less than they are worth. Next, I'll show you how to find these bargain stocks.
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Begin by making a list of stock picks that you consider to be good companies. If you don't know which companies are good, take a look at my eHow article called, How to Invest in the Stock Market (the link is in the Resources section below). The article will give you a good idea of how to select an online broker and how to find tools that will help you analyze a company for stock investment.
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Now here's the trick: of the stock investments that you are considering, you need to find out which stocks offer the best value. The easiest way to do this is by looking at the P/E or Price to Earnings Ratio. It sounds complicated, I know, but think of it like this: each share of stock is an ATM machine that spits out one dollar bill per year; obviously, if you collect enough of these ATM machines you will be able to earn a lot of extra money over time. But how much would each ATM machine have to cost to make it worth buying?
Think of the PE ratio as the price tag on the ATM machine that spits out one dollar bill each year. If the ATM machine is worth $10 to you, that means that a stock with a PE ratio of 10 would be a good value.
Simple as that!
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Tips & Warnings
You can find a company's PE ratio for free at Google Finance (finance.google.com). When you look up a stock in Google Finance, the PE Ratio will be listed in the first row as "P/E".
If the PE ratio begins slipping too low into the single digits, it might signal that there is something wrong with the ATM machine (the company) and this stock trade should be considered more carefully by making sure that the company is in good shape (see my eHow article in the Resources section: How to Invest in the Stock Market).
Although this strategy has been very successful over the long term, even valuable stocks fluctuate up and down over the short term.
It is important to diversify if you are buying single stocks. Don't put all your eggs in one basket.
If you would like to learn about investing in diversified funds called ETFs, please see my eHow article called, How to Learn More About Trading ETFs (Exchange Traded Funds). The link is in the resources section below.
