I do not recommend investing in individual stocks unless you know what you are doing. Novice investors are better off putting most of their portfolio in index funds. You get the same return as the market with low fees and no hassles.
However investing in individual stocks has it advantages. For one, you have different objectives than the “average Joe”. If you are fairly young, you should be able to take on more risk and invest in more volatile stocks. If you are nearing retirement, then putting more money into high dividend paying safe stocks is the way to go.
There are dozens of different things to look at once you have the stock quote. I like to look at long term charts of the stock, 1 and 3 years to see how the stock has been behaving and whether now is a good time to get into the company. The 50 and 200 day moving averages are also interesting but only if you know what to look for. If the 50 day moving average is higher than the 200 day moving average then the stock has had momentum as of late and vice-versa.
I like to then go over the last few quarters of earnings and I then look at analyst’s estimates for the next few quarters. And you can see if the company has been beating the earnings estimates of analysts over the past few quarters which is always a great sign. A company that exceeds the expectations of analysts time and time again, like Apple for example is usually very “grounded” and well run. You should make an effort to stay away from companies that have missed analyst’s expectations at least 2 of the past 4 quarters. These companies are the type that tend to over promise and under deliver which is not a good trait.
The single most important thing to look at is a company’s balance sheet if you plan on making a long term investment. If the company has many more assets than liabilities, it is in a pretty good shape financially. Having cash or “cash equivalents” is a great sign for a stock. If a company has a lot of debt or accounts payable, you might want to look for a more financially sound company. You should make sure that a company has more cash then debt. A company that has more debt than it can pay off is very stricken financially. Instead of paying dividends or making efforts to grow their business, debt ridden companies have to pay off their debt with the profits that they make.
I love when a company has a lot of cash on hand [at least 10% of its market cap]. A company with a significant amount of cash on hand can use their cash in dozens of rewarding ways. They can buy back shares of their own company, they can institute or raise their dividend, or they could buy out a smaller competitor. An example of a large company that has a lot of cash on hand is Apple [aapl], an example of a smaller company that has a lot of cash is Cogo group [cogo].
There is no one way to analyze a stock. Picking individual stocks is so hard that many professionals can not do so with much success. It is not easy to pick stocks and succeed in the long run put it is very rewarding.
I do not spend too much time trying to predict how the stock will behave in the short run like many investors try to do. I concede that I have no idea what the price of a specific stock will be in a week or even a month. I simply try to buy great companies at good prices and I try to hold the companies for as long as I can. This is similar to the way Warren Buffet invests; I’m only 50 billion dollars away from catching him in the net worth category!
This is a guest post from Evan, who blogs about the stock market and personal finance at stockinvesting101.net
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