- 1). Research the fundamentals of each stock you are interested in. Obtain a quote from a source such as finance.yahoo.com that shows the current price and the key statistics.
- 2). Review the earnings per share (EPS), the number of available shares and the price to earnings (P/E) ratio. The P/E ratio is the multiple of the EPS at which the stock is currently trading. Equities that trade at a lower multiple than the fundamentals suggest they are considered value stocks. These are generally good prospects.
- 3). Evaluate the performance charts and graphs. You can get these from sites like stockcharts.com. Consider the analysis provided by reputable sources to help you estimate the future EPS. Prices tend to follow earnings. Always use a variety of independent sources for your stock research. This will allow you to confirm the accuracy of your information and limit your risk.
- 4). Identify companies that have great potential for future growth and have not yet been priced to account for that growth. Potential growth is based on estimates of how much revenue will be generated over the next year (using the 10Q and 10K reports). Analysts who follow these stocks will provide their opinions. It is up to you to determine how accurate these estimates are. Be prepared to act promptly but not hastily.
- 5). Estimate a fair value for the stock and adjust it to account for current market circumstances. Remember that company performance is not the same thing as stock performance. If good company performance is already structured into a stock's price, then the stock may be a weak performer in the near future. Overpriced stocks eventually prompt unpredictable, drastic sell-offs.
- 6). Select good buying and selling prices that are realistic given the current market. These are called entry points and exit points. Don't miss a good opportunity by being too thrifty.
- 7). Place your order with a reputable stock trading firm or institution. Remember that you have not really "chosen" a stock until you have purchased it. Always plan your exit strategy before you buy. This will vary depending on whether you are a long-term or short-term investor.
previous post