Guidelines for Buying Stocks
With thousands of stocks to chose from on the major stock exchanges, it can be daunting trying to determine which to invest your hard earn money in. If you follow a few basic guidelines when deciding which stocks to buy, it can greatly increase your chances of making profitable investments.
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Look For Upward Trends
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When buying stocks, it's always a good idea to look for stocks that have already established an upward trend. It may sound like a cliche, but the trend really is your friend. If you see a company with a good, long track record of upward rising share prices, you can be sure it's either because of superior management, a great or essential product, a great business system or all of the above.
Buy the Dips
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Even stocks with a long-term history of appreciating share prices will have peaks and valleys in the short-term while they rise over the long-term. Try, if possible, to buy the stocks you want during the inevitable dips that will occur after a rally. Over the long-term, it probably won't matter even if you buy at the top of a short-term rally if the stock continues to appreciate, but it doesn't hurt to try to get a lower price, and that can be done by placing a buy order below the market price.
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Look For Rising Dividends
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The dividend is a portion of the company's profits that it shares with the owners of its stock. The quarterly dividend payout can be a very significant barometer of the health of a company. A company with a long record of paying consistent, steadily rising dividends to its shareholders is in all likelihood on solid financial ground. If a company decides to reduce or eliminate its quarterly dividend payout, it could be a sign that storm clouds are in its future.
P/E Ratio
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One of the most widely-used tools to value a stock for investment purposes is the price-earnings ratio. It looks at the ratio of a company's current share price compared to its per share earnings. For instance, if a company's stock is trading at $50 per share and its earnings over the last 12 months were $2 per share, the P/E ratio for the stock would be 25. Compare the P/E ratio of the stock you want to buy with other stocks in the same industry, For instance, compare a technology company with other technology companies. Usually, a high P/E indicates that investors are expecting higher earnings growth in the future compared to stocks with lower P/E ratios.
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