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Analyzing Stocks for Beginners
Trading in stocks is a common investing method, which when done properly, could reap profits for the investor. However, unlike ordinary buy-and-sell businesses, stock trading is much more complicated. Investing in stocks requires intimate knowledge of the financial markets and players, analytical tools, and on the part of the investor, skills and discipline.
A stock is the smallest unit of company ownership - you are a part owner of a company even if you own just one share of stock. Ownership of shares entitles you to vote on members of the board and other matters put before the company shareholders for decision, and share in company profits, if any. Of the two kinds of stocks - common and preferred - that are usually issued by companies, it is the common stocks that are traded in stock markets.
Anyone can buy or sell shares of publicly-listed companies, through the stock exchanges and brokerages that are aplenty in all major cities. However, before you grab your phone to place an order to your broker, here are the important things you should first consider when selecting stocks to invest in.
If you're a beginner in stock trading, it is best to start with a few shares distributed in different companies, rather than putting all your investments in just one or two. In this way, you can easily overcome losses as it would be far more unlikely for all companies you invested in to fall at the same time.
Use a one year price chart with a 50-day moving average to see whether the stock is in an uptrend or downtrend. It is alright to buy the stock if the current price is above the average (uptrend) but risky if its price is below the average (downtrend).
Another thing to consider is the price/sales (P/S) ratio of the stock. The P/S is derived either by dividing the market capitalization of the stock by the total revenues of the company or by dividing the current stock price by the sales per share. If the P/S of a commodity is above 10, the price is merely based on momentum and is not recommended to be bought. Conventional advice is to buy stocks with P/S below 10, but you should not rely on this indicator alone to guide you in your trading.
The average daily volume of shares traded is also a good indicator of a sound investment as these are fueled by institutional buyers. These investors prefer stocks with large daily trading volumes as these stocks enable them to easily move in and out of positions. Moreover, institutional ownership is a good gauge of how the market looks at the company and its stocks, as it would be foolhardy for any investor to buy stocks that institutions are ignoring. Your best bet then is to invest in shares in companies in which institutions own at least 30% of outstanding shares.
The financial health grade and growth grade of a company are also important considerations when buying stocks. You'll be fine if you invest in companies with solid financials (grade A, C, or C) and consistent sales growth over long periods (growth grade A or B).
Finally, you must also look into the opinions of analysts, as their coverage creates investor interest, particularly from institutions. Thus, you can safely buys stocks if at least four competent analysts are making buy recommendations.
A stock is the smallest unit of company ownership - you are a part owner of a company even if you own just one share of stock. Ownership of shares entitles you to vote on members of the board and other matters put before the company shareholders for decision, and share in company profits, if any. Of the two kinds of stocks - common and preferred - that are usually issued by companies, it is the common stocks that are traded in stock markets.
Anyone can buy or sell shares of publicly-listed companies, through the stock exchanges and brokerages that are aplenty in all major cities. However, before you grab your phone to place an order to your broker, here are the important things you should first consider when selecting stocks to invest in.
If you're a beginner in stock trading, it is best to start with a few shares distributed in different companies, rather than putting all your investments in just one or two. In this way, you can easily overcome losses as it would be far more unlikely for all companies you invested in to fall at the same time.
Use a one year price chart with a 50-day moving average to see whether the stock is in an uptrend or downtrend. It is alright to buy the stock if the current price is above the average (uptrend) but risky if its price is below the average (downtrend).
Another thing to consider is the price/sales (P/S) ratio of the stock. The P/S is derived either by dividing the market capitalization of the stock by the total revenues of the company or by dividing the current stock price by the sales per share. If the P/S of a commodity is above 10, the price is merely based on momentum and is not recommended to be bought. Conventional advice is to buy stocks with P/S below 10, but you should not rely on this indicator alone to guide you in your trading.
The average daily volume of shares traded is also a good indicator of a sound investment as these are fueled by institutional buyers. These investors prefer stocks with large daily trading volumes as these stocks enable them to easily move in and out of positions. Moreover, institutional ownership is a good gauge of how the market looks at the company and its stocks, as it would be foolhardy for any investor to buy stocks that institutions are ignoring. Your best bet then is to invest in shares in companies in which institutions own at least 30% of outstanding shares.
The financial health grade and growth grade of a company are also important considerations when buying stocks. You'll be fine if you invest in companies with solid financials (grade A, C, or C) and consistent sales growth over long periods (growth grade A or B).
Finally, you must also look into the opinions of analysts, as their coverage creates investor interest, particularly from institutions. Thus, you can safely buys stocks if at least four competent analysts are making buy recommendations.
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