Knowing how to choose stocks to trade is not a gift or a talent. It’s a common-sense driven procedure taking many factors in considerations. Here I will sort out a few of those factors to keep an eye on every time you get that itching for buying a stock.
1: P/E Factor
Price/Earnings or Earnings Multiple is simply the price of a stock divided by it’s earnings per share.
P/E = Price / Earnings … I know 🙂
A stock’s P/E is simply how much an investor is willing to risk to make one dollar. The higher the reading is, the more reliable the company is. The more you should be willing to buy its stock.
This compares the company’s stock to the S&P500, if the company is performing better than average, the reading will be higher than 1. If the company is performing worse than average, the reading will be less than 1, that means the stock is defensive, you wouldn’t necessarily want to be there.
That is a straight forward indication of how successful the company is. A company has only one job, to make profit. If dividend is generally more than 6%, that is great.
I know you are sick and tired of hearing the cliche “trend is your friend”, but let me put it really simple. You are just a trader/investor. You are not a social worker nor a consultant. If a company is performing well take the opportunity to be a part of it, otherwise, get the heck out. Don’t even try to figure out why that trend is going down, unless you have some time on your hand to kill. ONLY BUY AN UPTREND OR AT LEAST A RANGING MARKET (sorry for the caps).
5: Go for What You Understand or Know
The financial market is huge. There are hundreds and hundreds of company listed for trading. I have seen listed companies on the NYSE that I swear have never heard of before, never seen a store of theirs, not a product at the supermarket and not even a TV commercial.
When you are considering buying a company, make sure you understand what business it is in. You might buy a company that is a part of a failing sector or known to be failing despite its superficial recent financial readings.