Selecting good stocks requires the investor to consider his or her long and short-term financial goals, research companies and their management practices, and create and implement a strategy to optimize their return on investment. Analysts have a number of theories and practices they use to make decisions on whether a stock is a “buy”, a “sell” or a “hold”. While every analyst and broker takes a different position, they all look at the same financial information and data.
When looking at a company’s main financial statements, which are the income statement and balance sheet, pay close attention to the following areas. They are a good indication of the company’s overall financial health.
• Earnings: You should look at a company’s earnings. Ideally, the number should be ten percent higher than last year. Earnings are a good indicator of a company’s growth and growth potential.
• Sales: Sales should increase every year. If sales fail to increase, you may be looking at company on a downward swing.
• Debt: Companies on solid financial footing should be actively paying down their debt. If earnings and sales are up, debt should be down.
Good stocks are reflective of a company’s overall management strategy as well. There are a number of financial ratios you should explore and consider before purchasing stock and investing. These figures give you an idea about the company’s long term growth and performance.
• Price to Earnings Ratio (P/E)
• Price to Sales Ration (PSR)
• Return on Equity
• Earnings Growth
• Debt to Asset Ratio
All of these facts and figures should be available in the company’s prospectus, annual report and Security and Exchange Commission (SEC) filings. For penny stock and other off market stocks, you will need to do a little extra digging, as the SEC does not hold these companies to the same filing and listing standards as other companies.
Only you (and your broker) can decide what stocks are right for your investment strategy and financial goals. Good stocks will earn you money over time, and can withstand some of the market’s more volatile turns. Companies that provide goods and services people want are usually profitable. Surveying the products in your own home can help you identify some of the companies you may want to invest in. If your family is purchasing these things, there’s a good chance your neighbor is as well.
Diversity is key to picking good stocks. You should chose companies which represent different areas, sectors and industries. While you may be using a broker to manage your portfolio, you should keep yourself informed and up to date on market trends and your own positions ion certain stocks. Staying focused on your long term goals rather than the short term gains and losses will help you withstand the ordinary ups and downs of the market. Good stocks can be found- and purchased – at every price point. Once you have a clear idea of what you want to gain from your transaction, you can easily find the right stock opportunities to suit your needs.