How To Choose a Stock to Buy

Understanding the stock market is a complex and daunting task.  This is the main reason why a good majority of people trying out their investing hand rely on market consultants to make decisions for them.  In reality, choosing what stocks to buy and when to buy them is pretty simple, as long as you know what to look for and you have an objective in mind.  Many people just pick up shares in a popular and seemingly stable company without doing due diligence thinking that it will pay off later on.  A move like that is rather risky and if you invest quite a lot of dough, you may end up losing a lot of money.

1.    Determine your reason.  Before even starting your journey in the stock market, you should first reflect on the reason for taking the jump.  The stock you will purchase will be dependent on what you are looking for in the future.  If you are looking into long term yields and dividends, then value stocks may be suitable for you.  Growth stocks will be more suitable for you if you want to risk your cash in companies that look to significantly increase value in a short time.  These are potential “get rich quick” stocks. 

2.    Study the prospect.  Whenever you decide to invest in stocks you are actually purchasing a part of a business.  It is vital that before you invest any money into a business that you research on the history and stability of the business or company.  Remember to research on the viability of the company’s products and services, any outstanding loans and existing payment plans, and the historical data of its value on the stock market.  Doing the due diligence will ensure that your money is going into a place where there is acceptable safety.  It is important that you know well what to look for in a company.

  • Check the market history of the company to see if it has maintained a solid and above average profit margin.  Make sure to look for any trends and patterns.
  • Look at the return of equity.  Evaluate the long term return.
  • Research if the company has any debt and what is the payment plan and maturation of the debt.
  • Determine the marketability and stability of the company’s products and services in the long run.
  • Know the company’s leadership.

3.     Get the best deal.  Once you have done the due diligence on the prospective stock and company, it is time to get a good price.  Make sure you know what to look for to determine that the stock is ripe for purchase.

  • Stocks with a low P/E ratio.
  • Stable and decent dividend rate.
  • Make sure that the price is not on a rapid decline.  If so, only purchase at the lowest point.
  • Stocks with a low PEG ratio are usually good choices.

Anyone wanting to increase the percentages that the stocks they invest in will provide them good returns will need to put in the effort.  Due diligence is the key.  The task of choosing a stock is not really difficult since the resources are already within reach.  Take your time and study the game.  The experts all started the same way.


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