How EXACTLY do you go about choosing which stocks to buy?
Best Answer
1130 points
sundarkambam answered 6 months ago …
There are two aspects of stock buying:
A. Fundamental Analysis
B. Technical Analysis
Fundamental Analysis
Foremost Criteria : Stocks are reasonably valued in comparison to the earning growth.
Other points :
1. The future earnings potential
2. Outlook of the particular industry to which the company belongs.
3. The competitive position of the company within the Industry.
The Quantitative tools to be used for analysis can be:
1. P/E ratio less than double digits.
2. P/B ratio less than 1
3. Dividend yield ratio greater than 6 %
4. Price / Sales ratio less than 1
5. Price / Free cash flow ratio around 9 or less
B. Technical indicators when used in conjunction with the Fundamental ratio helps in timing the purchase.The technical indicators tell us where the stock is compared to its all time high and all time low during the last 10 years.
Other criteria to be used are :
1. High level of insider purchases ( Follow Tycoon report newsletter which highlights some of those purchases).
2. The Debt should not be more than 50% of the equity of the company.
3. A strong and stable management.
and finally the company's financial statements should be studied in detail .This throws up lots of points for and against picking the stock.
Happy stock buying friends .
Answers
2547 points
Oldman answered 7 months ago …
I search for securities that will pay me to hold their risk. Mostly, they are dividend -paying stocks, CanRoys and a few ETFs (BWX, PCY). So 90% of my invested moneys are in income-yielding securities...because I'm retired, and don't have a lot of "new money" to invest, and keep a large portion in cash and bullion as a "hedge" vs. catastophic events...such as needing a new roof after a hurricane.
I don't do options or trade frequently, and generally accept about a 9% pretax return as a good measure of success...which I've achieved over the last 25 years. No one stock holding is more than 2 % of the portfolio, excepting much larger positions in mutual funds and closed-end funds and ETFs, which seldom go bankrupt.
I do "dollar-cost-averaging" to rebalance within the accounts= if an allocation's assets have appreciated more than 10% vs. their long term trend, I "milk" some and put it into the allocations that have under-performed. This allows me to sell "high' and "buy" low...rather than have a constant purchase, or have dividends automatically redepositied (because the mutual funds always pay divs and gap gains when they've done well, and then these are "buying high".)
102 points
BC answered 7 months ago …
Let me answer by first talking about a friend I've known since high school. After graduating from HS, he went to work for a Chevy dealer as an auto mechanic in the early 60's. In his late teens/20's, he used to give an old man a ride to church every Sunday, since the guy could no longer drive, and had no local family members to rely on. That old guy had made millions over the years by investing in the stock market, so of course he gave my buddy an earful, which he took advantage of.
What it boils down to is he scoured the monthly S&P booklet for mid-cap or larger stocks with 5 or more years of continuing growth in sales and earnings, with no more than 50% debt/assets, mutual fund ownership, and a few other things I have written down somewhere.
My friend screwed up his back when he was 32, and ended up retiring on the stocks he had accumulated by that time. He not only made enough to pay the bills and survive, but is now a millionaire himself!
He told me about his stock picking exploits in the early 90's, which is about the same time I learned of NAIC (http://www.better-investing.org/) from the bean counter at work! The "Stock Selection Guide" (http://www.douglasgerlach.com/ssg/ssg_02.html) NAIC uses struck me as being very nearly the same as what my buddy had been doing for years. Both have been making average yearly returns of 15% over the long haul.
I'm not very religious at it, but I tend to mentally run picks thru the SSG, but also take a look at stock charts. If the stock is trending steadily down, I'll wait to buy; sideways or up, it's time to buy. I also look for high dividend stocks to hold for the long haul, even if they don't qualify via the SSG, as I'm looking for a steady cash flow for retirement, which is looming very near. I am presently waiting to load up on Business Development Companies, some of which are paying dividends around 10-15%, but are still trending down on the charts!
Hope I've given you a few ideas to research, and good luck with your stock investments!
138 points
Bob answered 7 months ago …
Don't remember how I ended up with two login names, but ignore BC above as he is history if I can get rid of him. ;) All my other posts are as "Bob". Will the real Bob please stand up!!! Repost of above message:
Let me answer by first talking about a friend I've known since high school. After graduating from HS, he went to work for a Chevy dealer as an auto mechanic in the early 60's. In his late teens/20's, he used to give an old man a ride to church every Sunday, since the guy could no longer drive, and had no local family members to rely on. That old guy had made millions over the years by investing in the stock market, so of course he gave my buddy an earful, which he took advantage of.
What it boils down to is he scoured the monthly S&P booklet for mid-cap or larger stocks with 5 or more years of continuing growth in sales and earnings, with no more than 50% debt/assets, mutual fund ownership, and a few other things I have written down somewhere.
My friend screwed up his back when he was 32, and ended up retiring on the stocks he had accumulated by that time. He not only made enough to pay the bills and survive, but is now a millionaire himself!
He told me about his stock picking exploits in the early 90's, which is about the same time I learned of NAIC (http://www.better-investing.org/) from the bean counter at work! The "Stock Selection Guide" (http://www.douglasgerlach.com/ssg/ssg_02.html) NAIC uses struck me as being very nearly the same as what my buddy had been doing for years. Both have been making average yearly returns of 15% over the long haul.
I'm not very religious at it, but I tend to mentally run picks thru the SSG, but also take a look at stock charts. If the stock is trending steadily down, I'll wait to buy; sideways or up, it's time to buy. I also look for high dividend stocks to hold for the long haul, even if they don't qualify via the SSG, as I'm looking for a steady cash flow for retirement, which is looming very near. I am presently waiting to load up on Business Development Companies, some of which are paying dividends around 10-15%, but are still trending down on the charts!
Hope I've given you a few ideas to research, and good luck with your stock investments!
167 points
DSWhite answered 7 months ago …
I'm still trying to build my "system". Right now, I check the morning star and the volumes to look for what's hot in the market. then i do some research on the potentials of these stocks. I do have friends that collect spam penny stock emails and hope they get in on it before the masses to make money.
Read more from DSWhite flag as abuse great answer
2703 points
MNSL answered 7 months ago …
I have tried almost all types of investment strategies in the stock market. Some became unsuccessful mostly at the early stage of my investing and some became very successful.
I think in addition to investment knowledge we must have knowledge about crowd behaviour as well.
In the future I will invest only stocks with consistent earnings and growth. I also like to do some initial research and analysis before buying stocks.Some of the characteristics that I will look in stocks are:
Higher return of equity
Higher earnings per share
P/E Ratio and company size
Higher dividend yields plus capital gain
Less debt and potential for growth and market share including export market
Higher demand for their products and service for next 05 years to 10 years
In addition I will look for interest rate, risk involved, currency movement, availability of primary products locally, effective cost control etc depend on type of business.
I like to follow value approach in addition to neglected stocks with great potential. I also like to apply different strategy in different market situation.
1130 points
sundarkambam answered 6 months ago …
Here is another link which exactly answers the question....I have only given some extracts below.
http://www.poweropt.com/six-point-checklist.asp
The Winners checklist:
1.Is the company making money?
This may sound pretty basic, but just because a company has a great product and strong advertising doesn't mean they are making money. Revenues, profits, and a strong balance sheet are the foundation of any company in which you would consider investing.....................
2.Is the P/E much higher or lower than other companies in the same sector?
The P/E (Price Earning Ratio) compares the stocks price to its earnings. A high number here means the stock price may be high for the amount of earnings the company is actually throwing off. A low number does not necessarily mean the stock is undervalued. It may point to some other problems.
The important thing is to compare the P/E for a company to others in the same industry..........
3. Does the chart point to a rising stock price?
Some investors are religious about chart watching. They live and die by complex chart patterns, calculations, and esoteric cues. This level of analysis would be nice but is probably not needed for longer-term investors.......
4. Has all the recent news been good?
Bad news can kill a stock's price and keep it down for a long time. Unfortunately good news does not seem to have the same kind of lasting effect on a stock. Good news may give the stock a short-term pop but it seems like investors remember bad news for a long time. Much longer than they remember good news.
Some news sites will filter stories (i.e. Bloomberg, Yahoo, Wall Street Journal) because they seem to favor their own internal resources. To do a good news search you need to use a source that shows most everything on a company.......
5. Are company insiders holding onto their stock?
Company executives and board members usually receive large stock grants. What they do with that stock can be very telling. No one knows more about a company's prospects than the CEO, CFO and board members. Is there a hot new product on the horizon or a pending accounting scandal? These people will know long before the general public..........
6.Can you profitably hedge your way into the stock?
We all took some lumps over the last few years on stocks that dropped in price. If more investors used simple hedging techniques, the pain probably would not have been as bad. No matter how great a stock looks, it can still drop the day after you buy it. But if you use a simple hedging technique known as covered call writing you will be protected against a potential drop in the stocks price.
If a stock costs $35 a share and you can hedge the stock purchase by 5% to 10% in the first 60 days, you will sleep a lot better on those nights after the stock drops. By continuing to hedge month after month you should be able to create a price cushion in the neighborhood of 20% to 30%...........
No checklist like this one can be complete. So many variables and unknowns determine a stock's price and the way it fluctuates over time. Using a structured method like this Winners checklist to choose the stocks you add to your portfolio should result in better returns over the years. It took time and hard work for you to build the value in your portfolio to where it is today. The future growth of your holdings will be a big factor in how you enjoy your life so it is worth your extra effort and time to build that portfolio's value for the future.
This uncertain market is the best time for investors to use covered calls, spreads and other cash-producing option strategies to hedge their portfolios. You make these transactions with your broker, similar to buying and selling stocks.
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