What To Look In A Stock?

Making a stock investment isn't as simple as putting a copy of the Wall Street Journal

on the office wall and throwing darts at it, hoping to hit a company with high value. Investing doesn't have to be complicated, but it does require some thought before deciding to put money on the line. Several things need to be examined before jumping into stock investment.

Many people start the process by making a list of companies they wouldn't mind owning. It could be a company that manufactures one of their favorite products or a company they heard about on the news. From that point they can begin the analytical process to determine whether there is a potential for future profits or if the company is headed for a downhill slide. It's important to determine a company's direction before investing hard-earned cash.

A look at the company's stock price will provide a general indication of the public's feeling about the stock. If the stock is at a 52-week high, you'll likely find optimistic company news that shows why profits could be attainable. When a stock's price is going up, the reasons might be found in fundamental analysis; perhaps the price-to-earnings ratio is good, perhaps the market capitalization is rosy, perhaps the stock fees are fairly priced, and company management is seen in a favorable light.

The same information is also evident when a company's stock is undervalued or has a diminished stock price. In that case the ratios (price to earnings, price to book, price to revenue, etc.) may be out of whack, the market capitalization could be out of line, the stock fees overpriced and company management in turmoil. The return may be an undervalued stock with negative company information. The opportunities for immediate profits in this case are not good.

The key is to conduct due diligence while going through the analysis process. Much like a car buyer will lift the hood and take a look at the motor, an investor will look over the fundamentals, perhaps take a peek at the technicals, and put the stock on a list of candidates to watch. Scour the internet for any company news that might prove enlightening and check the opinion that third-party observers have about your potential stock investment. Just be sure your facts come from a source that is not aligned with the company, otherwise your information will be skewered.

Remember that a stock selling at an all-time high or a 52-week high is pushing the envelope and expending a lot of energy to remain at the high level. That means it might be time for the stock to retrace to a more comfortable level of trading. The same is true about stocks selling at an all-time low or a 52-week low; they may be getting ready to rebound and provide value. Investing is about knowing the heartbeat of your stock candidates. By keeping these factors in mind during the selection process, you can end up with a stock with more growth potential and, therefore, more profits.

by: Matt kaldor

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