How to Find Good Stocks to Invest In
The quest of every individual investor is to find good stocks to invest in. However, the term "good" can be very subjective. It's better to invest in companies that have strong fundamentals and a competitive advantage.
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Instructions
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For starters, every investor should look at and analyze the fundamentals of a company before they invest. This research is imperative to making a good investment. A company's fundamentals include things like earnings, debt, competition and the value of their product to the customer.
A good company should have strong earnings that are growing year over year. Increased earnings per share are a good indicator on whether the company is headed in the right direction. These earnings serve as the key to a company's long term investment in expansion, research and further product development.
A good company should have low or no debt. Part of the problem with many failing companies is that they overextended themselves and borrowed too much money. Then, when the loans came due, they were unable to meet their obligations. This lead to bankruptcy and a total loss for the company's equity investors.
A good company should be a market leader. They should have an easily recognizable brand that people trust. An example is Coca Cola (KO). They have a world renowned brand for which many customers will pay a premium. This makes them very successful and their stock a good one to invest in. Yes, they have competition, but no other company has the worldwide product distribution and customer demand like Coke (KO) does.
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Next, analyze a stock's fundamentals. By looking at the basic fundamentals of a stock, like price to earnings ratios, dividend increases, dividend rates, and dividend ratios, you can more easily ascertain the strength and value of a company and their shares.
A good stock has a price to earnings ratio (PE ratio) that is reasonable. It should be either average or below average when compared to peers in the same industry. High PE stocks are sometimes very overvalued and will fall in price quickly, if they stumble.
Good stocks will show a trend of dividend growth. This means that every year the amount of the dividend that they pay to shareholders increases over the previous year. This is an indication of a profitable company that is sustainable.
High yielding stocks are good for investment. A stock that pays a decent yield, 3 to 6 percent, can be good for your portfolio. These stocks reimburse their shareholders with a payment every quarter or yearly for the risk of owning shares in the company. However, stay away from stocks with very high yields, 10 percent or more, because many times these yields are unsustainable and the dividend will be cut at some point.
A stock with a low dividend payout ratio can be a good investment. The dividend payout ratio should be 50 percent or less. This means that a company pays out no more than fifty percent of their earnings in the from of a dividend. That means that the company is not straining to pay the dividend every time and that the dividend payment should remain stable.
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Finally, look at the fundamentals of the company's industry or sector. These sector or industry factors can play a large role in the investment potential of a company and their shares.
Some industries are in a rapid decline and companies in those industries are generally not good investments. An example is the newspaper industry. Many newspapers are hemorrhaging money and will close at some point. They cannot compete with the modern forms of news and entertainment, like TV and the internet.
Some sectors like oil, coal and natural gas rise and fall in value based on the demand for their products. This demand can decrease in a worsening economy and cause the share prices of these companies to fall. Avoid investing in these stocks when they are overvalued and at a peak.
Some industries can experience rapid growth in a short period of time. An example of a high growth industry was technology. These stocks spent the first year of this decade at unbelievably high share prices and PE ratios. However, investors lost faith in the tech industry and the bubble popped. Many of these companies disappeared forever. Steer clear of these rapidly growing "bubble" companies and their stocks.
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