How to Research a Stock Purchase

With the recent volatility in the stock market and the uncertain economy, stock market investors need to be more vigilant than even in selecting the best companies to invest in. It is very important in this economic climate to take charge of your finances by being an educated and discerning investor.

Difficulty: Moderate

Instructions

1. Once you narrow down some companies you wish to invest in (which is beyond the scope of this article), the first step is to find an online resource to conduct your research. If you use an online brokerage account such as Scottrade or TD Ameritrade these websites often have a wealth of research material available to their members. Additionally, sites such as Yahoo, MSN and Google have money pages with research tools available to everyone. Other online research tools are Standard and Poors, a market research leader, NASDAQ.com, and the Wall Street Journal website.

2. Learn about the different kinds of information out there on a company and what it means to a potential investor. One thing that pops out is the stock's chart, which shows the stock's price per share through a historical period (you can set your time period). While the chart will show you where the stock has been, remember that it won't tell you where the stock is going. However, you can get a good idea about how volatile a stock is, if it's trading at a high or low point, and how close the current price is to the 52 week highs or lows.

3. Another useful piece of data available online are EPS reports. An Earnings per Share (EPS) number shows just that: the amount of a company's profits which are allocated to each outstanding share of its stock. A potential investor can look at EPS as an indicator of a company's profitability.

4. Another good indicator to look at in your research is the price to earnings (P/E) ratio. The ratio shows a stock's share price divided by its earnings per share and is one of the best indicators of a stock's value. If the P/E is high, the stock has a high share price compared to it's earnings, while a low P/E can indicate good value. It can be useful to compare a company's P/E with that of other similar companies.

5. Besides these 3 basic things to look at, be sure to read up on the stock. Understand what they do if you aren't familiar with the company, and look over recent news articles to find out if the company may be close to making a move that could affect it's share price. See whether the company executives are buying or selling, and browse the recommendations (buy, sell, or hold) by various stock evaluating organizations.

Tips & Warnings

• You should look at the whole picture of a stock and not rely on any of these indicators by themselves.
• Understanding these indicators takes time, but it's worth the effort to improve your investing skills.
• This is not professional financial advice and I am not a qualified financial advisor. Do your own research to validate any of these facts.
• Do not invest money in the stock market which you need in the short term.