Oct 15, 2010

Basic Tips For Picking Your Company

There are many analysts sending free alerts or analysis telling you the big secret or the next shining star on exchange universe. It is the best if you control your choice by doing your own simple research at the beginning. You better know your need and at the end of the day you gain useful experience and knowledge. Picking stock is just like buying car. When you buy car you carefully select the best offer, choose performance characteristics - fast sport car for highways or heavy truck for bumpy roads. If you buy your car only because it has four wheels than you better don’t invest. You only waste time and worst - your money. So the car buying strategy is pretty much the same with picking stocks. You should pick sport fast growing stocks during expansion when economy is on highway but when it enters the rocky road of the recession than you have to switch.
Selecting socks
For selecting the most appropriate stock you have to use certain tools. Those tools are free and you can find them in the net. There are many sites giving you investing tools for selecting stocks but most of them are complicated so you have to spend hours to simply understand how it works. The most important thing is to create your own simple methodology for picking up and testing the stock. Something like black box in which you input the stock and output your decision based on this method. Following is descried  such. You have the freedom to select whatever source of information you like. Mentioned are just for example.
First step of this methodology is choosing the risk profile of the investment. If you want high gains than you should tolerate higher risk. Then you have to focus on the prospective sectors and industries for the current economic conditions. Briefly said during expansion you invest in stocks of cyclical sectors and during recession in noncyclical. Next step is to check latest news and developments about the company. Don’t be afraid from bad news. This is perfect possibility for making profit. Of course if the problem is structural and persistent than go away. After that check financial performance. You don’t need complicated financial models and valuations to see historical trend of earnings and to determine potential of growth considering current economic conditions. Take a look at ratios of the company, at least basic ones like PE (price per earnings) – showing how expensive is the stock comparing price to net income; debt to equity – showing debt burden for the company, lower the ratio better for the company; check also profitability ratios of the company – margins. You can find the ratios here.
Next step is to review institutional investors. This is important, because if you own stock with small share of institutional investors the stock moves could be unpredictable to some extent. Institutional investors are professionals and perceived to be taking their decisions based on complicated valuation models and thus more accurate (although not always true).
Insiders and insider trades in particular are signal for upcoming important event but sometimes they just exercise their expiring options.
Technical analysis is important for timing your investment. Financial analysis is giving you the right stock but technical is showing you when to buy. Entering the position at the right time is giving you advantage, especially in flat markets. If you have some technical skills – good, if not check others opinion. You should consider that is is better if you learn doing it by yourself, because this way you follow both share and market closer and that is what is giving you the comprehensive experience.
This is simple methodology for selecting stock. Stick to it and you will precise your choice. However this is just beginning. To be in time with the market you should do some in depth analysis and follow your choice. People change and stocks do. Don’t miss your profits by thinking your current choice will last forever.

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This work with autor CapitalHubs.com is licensed under Creative Commons 3.0.