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 So you want to know how to go about finding the best stocks to buy. Well, before you can go about deciding what the best stocks to buy are you first have to understand what you are really looking for.
What Stocks to Buy?
The answer to that question is very simple; you are trying to figure out what stock to buy before the rest of society wants to buy that very same stock. It's called the stock market for good reason. It's a very efficient market that follows the simple laws of supply and demand. From your perspective, you want to buy a stock just before demand for that stock skyrockets. This means you need to buy an "undervalued" stock.
Now that we know what kind of stock we want to buy (undervalued ones), we have to be able to identify the specific companies in which we'd like to invest our hard-earned money. There are nearly 3,000 companies listed on the New York Stock Exchange alone, so unless you've got a lot of time we need to quickly narrow the list. The following guide will help you in that process, but there is no substitute for conducting your own research.
Researching Good Stocks to Buy
In fact, the entire approach outlined below is based on a series of articles dealing with the topic of stock research. In the not too distant future, we're going to addressing the specific question in an article entitled - the Ten Best Stocks to Buy. But for the time being we're going to discuss the mindset you should have when you're trying to decide if you should if buying a particular stock makes sense for you.
Pick a Market Sector that You Understand
A lot of people might like to play the market on gut, but we're not comfortable buying shares of a company that is in the controlled nuclear fusion business. We'd rather spend our time focusing on sectors that we know and understand, rather than learning about nuclear physics.
That means focusing on business sectors that we interact with daily - car manufacturing, toothpaste, or lawnmowers.
Pick a Stock with Real Value
The best stocks to buy will be those that demonstrate good fundamentals. Some of you might be thinking now - this magazine is old school; they aren't even going to mention technical analysis. Well, you're right on that point.
Technical analysis is the study of trading patterns and historical prices of a stock. If you've ever been a day trader in a bull market, then you might be sold forever on technical analysis. We like a little more depth to our stock research.
Fundamental analysis means you are looking at and comparing Price / Earnings ratios, book value, cash flow, and return on assets. If you're not familiar with these terms, then take a look at our article on Understanding Financial Ratios.
Basically, you are looking for stocks with real intrinsic value. Something we discuss at length in our second publication on stock research.
Avoid Stocks with Potential Liabilities
There are lots of stocks to choose from, so it is a good idea to stay away from stocks that are in the news because of large and looming lawsuits. Legal problems can drag on for years, so your best bet is to steer clear of companies that have these headaches.
Look for Companies with Bright Futures
Although past performance might be a good indication of future returns, the reverse can also be true. If you find a stock with good fundamentals, then make sure you look at the predictions of the analysts that track the stock. At the very least, make sure they are predicting stable or growth in earnings per share.
If there is one thing we've learned from the dot-com bust of the 1990s, it's that companies need to be profitable to stick around. And don't be confused when people start talking revenues. A company can have a huge revenue stream, but earnings are the measure of a company's profitability. If you're serious about investing in the stock market, you need to understand fundamental research topics such as earnings per share estimates.
Finding a Stock that is Not Popular
This is probably one of the most difficult things to do - you want to pick a stock that is not popular today, yet could be popular tomorrow. Remember, it is supply and demand forces at work here in the market. If a stock is popular, then this means that demand has already pushed the price higher. You want to find a "sleeper" stock - a stock that is being ignored by the market presently but has the future potential to pull out and up.
If you follow these guidelines, you should stay one step ahead of the crowd. By finding a fundamentally strong stock in a sector that you understand, you should be able to rest comfortably knowing that you picked a stock with the potential to provide for rewarding returns.
About the Author - Finding the Best Stocks to Buy
Bill Sharlow is the Editor of Money-Zine.com. Copyright © 2004 - 2007 Money-Zine.com
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