How to Research a Stock Before You Buy

In order to be a smart investor and make educated stock picks, you need to do your research before you pick out a stock to buy. Use these formulas below to evaluate a stock before you purchase it.

Things You'll Need

• Time
• Good Financial Source (such as Yahoo Finance)

Instructions

1. Company History/Foundation

   This is a great place to start to determine whether a company's stock is a good investment. Also, one of the most important and easiest measure of a company's credibility. If a company has a great history of growth and earnings, then usually their stock price should reflect this. A profitable company should yeild a growing stock price. Good examples would be GE, Proctor & Gamble, Apple...these are all stable companies with a long history of growth.

2. Price-to-Earnings (P/E) Ratio: = Price per Share/Earnings per Share

   The P/E ratio is one of the most popular ratios investors use to evaluate a stock. The ratio tells you how much investors are willing to pay for a company's earnings. For example, if GE is trading at $20 per share, and the earnings came in at $2/share, then its P/E would be (20/2)=10. Generally, an ideal P/E ratio is considered between 10 and 30.

3. Cash Flow: How much profit is the company making?

   Cash flow will tell you how much profit a company is making. The more cash flow a company has, the more excess cash they are likely to have to be invested. Also, a company with good cash flow is more likely to avoid bankruptsy.

4. Dividends: Is the company paying any dividends?

   When a company has a profitable year, they should theorectically pay some of those profits out to the stock holders. When evaluating a company stock, be sure to check whether the stock pays a dividend, how long they've paid that dividend, and how much it is. A steady dividend makes investors happy, which leads to a raising stock price. A company like GE has paid a steady dividend every year since 1969.

5. Beta: How Volatile is the stock?

   Beta measures the volatility of a stock compared to averages of the S&P 500. If a stock moves the exact amount as the S&P in a given period, then the Beta will be exactly 1. If a stock moves up and down twice as much as the S&P, then it will have a Beta of 2. This means it is twice as volatile as the S&P. If the stock moves half as much as the S&P, the Beta will be 0.50.

6. Market Capitalization (Market Cap): Total Market Value of a Company's Outstanding Shares

   This formula is important when evaluating a company because it helps you gauge the risk and growth potential of a stock. The categories for market capitalization are: Mega Cap, Large Cap, Mid Cap, Small Cap, Nano Cap. Generally, any stocks in the first three categories, Mega, Large and Mid Cap, are considered safe investments. Any company with a market cap of above $1 billion is usually a safe investment. Anything below that (Small or Nano Cap) is usually high risk, but high reward potential.

7. Book Value per Share: Total Assets - Liabilities/Total Number of Outstanding Shares

   This formula is basically the total value of the company, divided by the number of common shares. It basically tells you how much of the companies value is held in each share. In otherwords, if the company liquidated all their assets tomorrow, this is how much each share would be worth. This formula is very straightforward for finding what the market price of a stock could be.