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Stock trading opens up a vast world of wealth accumulation for investors. However, it is only possible when the investor can choose the "award-winning" stocks that bring true value for the money invested. Here comes the most pertinent question of how to choose a good stock. Contrary to the belief some investors have, there can be no set formula or rule that applies to this methodology of choosing stocks. It depends a lot on the personal knowledge and capabilities of the investor. However, there are certain things that can be followed and kept in mind while making a decision.
1. Paying attention to the what the market says:
With so many different factors affecting a company's overall profits and condition, it is very difficult to predict which stocks hold good in the long run. But, one should be careful enough to keep an open eye toward the market conditions. Stocks do not take care of themselves; hence, it is the job of the investor or the stock broker employed to keep a track of the good stocks. A lot of information available in the market is intangible. The profits of the company can be measured; however, factors like the company's staff, its competitive advantages, its reputation, etc., hold a more crucial role in determining the performance of the stocks. For example, if a company's staff is involved in some kind of a scandal, its stock prices are sure to hit the "bottom."
2. Investigating and researching:
What makes a good stock picker is a vast knowledge of the stock market through constant knowledge gathering. So it is very important to study and research a lot of factors before coming to a decision.
a. The history and background of a company
Good management, quality products or services, etc., helps a company to do well in the market. Quality and integrity helps a company to stay strong in the long run. Hence, it is essential to do a background check of the company and its management before making a heavy investment.
b. News about a company
Reading about publicly traded companies, stock market, etc., on websites and newspapers help to gauge the present and future potential of a company. The Wall Street Journal and the Business section of the local paper are like "Bible" to a devoted investor. Another factor is analyzing a company's financial statements and balance sheet. The income statement gives s good idea of whether a company goes beyond analysts' expectations, making a good investing option. A positive, large, and increasing cash flow indicated by the cash flow statement also predicts a good potential for growth. The PE ratio, or the Price/Earnings ratio, is a measure of the value of a stock.
"PE ratio = market price of the share / earnings per share" When the ratio is 1 it may mean that the stock price is fair; when greater than 1, it may mean that it is over-valued. Thus when it is less than 1 and means that it may be under-valued, an investor may assume that the stock has good potential for growth. Another factor is the top management and the outlook of the stakeholders. A company's future depends on its leaders. So this factor must also be considered while investigating about the company and its stock.
3. Not putting all "eggs in the same basket":
Diversification is a very good way to cushion against the fluctuations in the stock market. It is always wise to spread the investment over a large number of companies, rather than investing a large proportion in the same company.
1. Paying attention to the what the market says:
With so many different factors affecting a company's overall profits and condition, it is very difficult to predict which stocks hold good in the long run. But, one should be careful enough to keep an open eye toward the market conditions. Stocks do not take care of themselves; hence, it is the job of the investor or the stock broker employed to keep a track of the good stocks. A lot of information available in the market is intangible. The profits of the company can be measured; however, factors like the company's staff, its competitive advantages, its reputation, etc., hold a more crucial role in determining the performance of the stocks. For example, if a company's staff is involved in some kind of a scandal, its stock prices are sure to hit the "bottom."
2. Investigating and researching:
What makes a good stock picker is a vast knowledge of the stock market through constant knowledge gathering. So it is very important to study and research a lot of factors before coming to a decision.
a. The history and background of a company
Good management, quality products or services, etc., helps a company to do well in the market. Quality and integrity helps a company to stay strong in the long run. Hence, it is essential to do a background check of the company and its management before making a heavy investment.
b. News about a company
Reading about publicly traded companies, stock market, etc., on websites and newspapers help to gauge the present and future potential of a company. The Wall Street Journal and the Business section of the local paper are like "Bible" to a devoted investor. Another factor is analyzing a company's financial statements and balance sheet. The income statement gives s good idea of whether a company goes beyond analysts' expectations, making a good investing option. A positive, large, and increasing cash flow indicated by the cash flow statement also predicts a good potential for growth. The PE ratio, or the Price/Earnings ratio, is a measure of the value of a stock.
"PE ratio = market price of the share / earnings per share" When the ratio is 1 it may mean that the stock price is fair; when greater than 1, it may mean that it is over-valued. Thus when it is less than 1 and means that it may be under-valued, an investor may assume that the stock has good potential for growth. Another factor is the top management and the outlook of the stakeholders. A company's future depends on its leaders. So this factor must also be considered while investigating about the company and its stock.
3. Not putting all "eggs in the same basket":
Diversification is a very good way to cushion against the fluctuations in the stock market. It is always wise to spread the investment over a large number of companies, rather than investing a large proportion in the same company.
