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Financial Independence
Escape the Rat Race
Sizing up a Stock, by David Drews
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So you have found a company that you may want to buy shares in. You have
a hunch that a certain stock is going to go through the roof. That’s great. Let
money in a stock investment no matter how well thought out your investment
decision is. Remember you can ask your broker or fee only financial planner
about a stock you have found. You may want to begin trading on paper or in
an online stock market tournament to test your theories and hunches. OK
here we go:
- What are the company’s earnings? Is the company profitable? If not, you are
assuming greater risk. But if you can get in before a company becomes
profitable you could make a lot of money. Does your company have cash on
hand to make acquisitions or buy back its own shares?
- Are the earnings steadily increasing or are earnings down in comparison
with past earnings? If earnings are temporarily down you may have a good
opportunity.
- Does the stock pay a dividend. If it does, how much have the dividends
increased by over the years?
- Evaluate the business model. You do this ft>calling customer relations, reading analyst reports.
- If you are investing in a new company, ask yourself if the product will catch
on. There is no way to know for sure. But if you use the product yourself and
are pleased with it, or are anticipating a new product, there may be a good
chance. Be advised there is a chance the product may become obsolete
quickly. There is also the chance that a competitor will offer a cheaper and/or
better alternative.
- How good are prospects for growth?
- Do people need or want the product? You are probably safer in a company
that sells what people need. But you can make a lot of money by investing in
a company that sells what people want.
- What percent of the market share does your company have? If your
company has a small market share, what makes you think the market share
will increase? Did you find a company with a monopoly or a virtual monopoly?
by reading the news about your
prospective company, visiting its web site, going to visit the place of business,
- Management. Are the managers of the company noted for excellence? Do
the managers have a history of putting great deals together? Are they well
qualified? Are they undisputed leaders in their field? Do you read about the
managers from time to time in major business magazines (Fortune, Forbes,
and Business Week)? Is the company looking for a new CEO?
- Does management of your company own a lot of company stock? Have the
managers (insiders) been buying stock? It is a good sign when insiders are
buying rather than selling.
- P/E ratio. If you are looking for low P/E ratios, you are looking for a value
play. If the P/E ratio is high, the higher your risk is. When an investor picks a
stock with a low P/E, this is a value play.
- Does the company have a lot of debt? Loads of debt is bad. Large debt
positions prevent spending on research, acquisitions, dividends, share
buybacks, advertising, etc.
- Check the news about your stock every day. You may want to add to your
position or sell your position. Remember, let your winners run and cut your
losses short.
- Have an exit strategy. Figure out when you will sell your shares. Decide how
much of a loss you will take before you sell. If the stock does well, when you
begin taking profits? How long will you wait to take profits?
- You can look up most of the information above by checking the investor
relations web site of the companies you are interested in. And, you can
research companies at your brokerage's site or at Yahoo Finance, or a large
number of other financial sites.
- Take a look at the stock market books in the independent wealth bookstore
for more information.
a hunch that a certain stock is going to go through the roof. That’s great. Let
money in a stock investment no matter how well thought out your investment
decision is. Remember you can ask your broker or fee only financial planner
about a stock you have found. You may want to begin trading on paper or in
an online stock market tournament to test your theories and hunches. OK
here we go:
- What are the company’s earnings? Is the company profitable? If not, you are
assuming greater risk. But if you can get in before a company becomes
profitable you could make a lot of money. Does your company have cash on
hand to make acquisitions or buy back its own shares?
- Are the earnings steadily increasing or are earnings down in comparison
with past earnings? If earnings are temporarily down you may have a good
opportunity.
- Does the stock pay a dividend. If it does, how much have the dividends
increased by over the years?
- Evaluate the business model. You do this ft>calling customer relations, reading analyst reports.
- If you are investing in a new company, ask yourself if the product will catch
on. There is no way to know for sure. But if you use the product yourself and
are pleased with it, or are anticipating a new product, there may be a good
chance. Be advised there is a chance the product may become obsolete
quickly. There is also the chance that a competitor will offer a cheaper and/or
better alternative.
- How good are prospects for growth?
- Do people need or want the product? You are probably safer in a company
that sells what people need. But you can make a lot of money by investing in
a company that sells what people want.
- What percent of the market share does your company have? If your
company has a small market share, what makes you think the market share
will increase? Did you find a company with a monopoly or a virtual monopoly?
by reading the news about your
prospective company, visiting its web site, going to visit the place of business,
- Management. Are the managers of the company noted for excellence? Do
the managers have a history of putting great deals together? Are they well
qualified? Are they undisputed leaders in their field? Do you read about the
managers from time to time in major business magazines (Fortune, Forbes,
and Business Week)? Is the company looking for a new CEO?
- Does management of your company own a lot of company stock? Have the
managers (insiders) been buying stock? It is a good sign when insiders are
buying rather than selling.
- P/E ratio. If you are looking for low P/E ratios, you are looking for a value
play. If the P/E ratio is high, the higher your risk is. When an investor picks a
stock with a low P/E, this is a value play.
- Does the company have a lot of debt? Loads of debt is bad. Large debt
positions prevent spending on research, acquisitions, dividends, share
buybacks, advertising, etc.
- Check the news about your stock every day. You may want to add to your
position or sell your position. Remember, let your winners run and cut your
losses short.
- Have an exit strategy. Figure out when you will sell your shares. Decide how
much of a loss you will take before you sell. If the stock does well, when you
begin taking profits? How long will you wait to take profits?
- You can look up most of the information above by checking the investor
relations web site of the companies you are interested in. And, you can
research companies at your brokerage's site or at Yahoo Finance, or a large
number of other financial sites.
- Take a look at the stock market books in the independent wealth bookstore
for more information.