Monday, August 8, 2011

How to Select Best Stocks to Buy

Before buying shares, it is important to do some study and research to select the best stocks to buy. Study following points of a company before buying its’ stock:
  • Sales and Revenue: See how much a company has sold during a financial or in the last few quarters. If the sale of the company is for the current year is more than sales of the previous, it means the company is growing. If growth of sales in very little or there is no growth, it means the company is not doing well. Sales and revenue can give god indication about growth of the company.
  • Net Profit: Look at the balance sheet of the company and see the net profit. Compare the net profit of the current year or current quarter with the net profit of the previous year or previous quarter and see if there is any increase. If the company is earning more, you will earn more from the company.
  • Return on Investment: Return on Investment or ROI is the return on capital invested in the business. If a company invests $ 10,000 is a business to earn $ 2,000 then the Rate of Return is 20%. The more the rate of return, the better is the stock.
    Best Stocks to Buy
  • Volume of Trade: Look at the volume of shares traded on a day. Compare this volume with the average daily volume of the company. If more people are buying shares, it means the stock is very active. Do more research on the company and its latest news and announcements. Volume is also an indicator of the liquidity in a stock. If price of a stock is moving up on high volumes, it could mean that mutual fund companies and big investors are buying huge number of these stocks. When price of a stock moves down on huge volume it could mean that shareholders are selling the stock.
  • Market Capitalization: Total Number of Shares * Current Price Per Share is called current market value of a company or market capitalization. This number can give you idea about the size of a company.
  • Company Management: Top management of a company must be highly qualified and experienced in the business. A poor team of management cannot run a business in profit. Study about the management of the company and their past and present record. The Managing Director of the company must be a person of good knowledge and competence.
  • Price-to-Sales Ratio (PSR): This ratio measures the actual price of stock of a company with the current selling price. If the ratio is below 1, it means the shares are priced correct. If the ratio is above 3, it means the shares are highly priced than its’ actual price. A PSR above 3 is almost like a guarantee of loss. Try to buy shares with PSR below 1 for sure success.
  • Return on Equity: This number measures how much return you are earning on your investment. A return of 20-25% is considered good.
  • Debt-to-Equity Ratio: As the name suggests, this is the ratio of debt and equity of a company. Debt-to-Equity Ratio = Total Debt ÷ Equity Capital. Good companies will always this ratio at 1 or below. If the ratio is at 2 or above, it is a signal of poor health of the company (there are certain limited exception to this).
  • Beta: These numbers measure the volatility of the stock against index. The higher the beta, the more volatile the stock is.
  • Earnings Per Share (EPS): This tells how much a company is earning per share. Earnings Per Share = Net Profit ÷ Total Number of Equity Shares. When doing research on a company, compare the EPS of the last 2-3 quarters.
Most of the above information is available on the websites of companies and on website of stock market. E-broking websites also provide such information. Using good screening tool, make a watch list of companies that you are interested to invest. Do above research on all the companies and invest your money in top 20% stocks in you watch list. Have a diversified portfolio. Never invest all you money in a single stock. Invest in diversified sectors and companies.

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