|
Answer:
Dear Alison,
That's
a large question and there are large number of articles
and books on the subject. But to get you started,
I focused on four factors. In addition, use common
sense and don't buy (or sell) based on emotion or
tips found late at night on the Internet or heard
the next morning at the gym. You might also want to
browse through previous columns. To do so click HERE.
1.
Liquidity
Before
adding a stock to your portfolio, make certain it
is widely traded. If you should need to sell it in
the future, you want to know that there will be a
sufficient number of potential buyers. The liquidity
concept is also directly tied to supply and demand
-- when there's demand for a stock, the price of the
stock will increase.
Another
reason for dealing in exchange-traded stocks is that
there is much more information available about these
companies and far more research by security analysts.
Illiquid
stocks, such as those that trade on the pink sheets,
are rarely followed by Wall Street.
2.
Low P/E
You
don't want to overpay for stocks and tracking P/Es
will help you avoid doing so.
The
P/E or Price to Earnings ratio is the market price
of the stock divided by its earnings per share. It
expresses how much an investor is paying for a potential
future stream of earnings. A company whose stock sells
for $30 per share and earned $2 per share has a P/E
of 15.
Generally
companies with high P/E's are younger companies in
fast-growing industries. Many high P/E stocks do not
pay dividends.
On
the other hand, stocks with low P/Es offer higher
yields and typically come with less risk. Many older
well established companies often have lower P/Es.
Value
Line Investment Survey (www.valueline.com)
lists stocks by P/E ratios, making it easy to compare
them within individual industries.
3.
Growth
You
want to own shares in a company that is growing, not
stagnant. Your best sources for this information are
the company's annual and quarterly reports and its
independently written analysis in Value Line.
Continually
monitor for factors that may limit growth: government
legislation, outdated products, law suits, errors
by management, the emergence of hot-shot rivals, excessive
debt, negative publicity. Keep up-to-date on these
points by reading the financial pages of several papers
(NY Times, Wall Street Journal, Investors Business
Daily, USA Today) and listening to the news on
radio and TV.
4.
Holdings
When
reading the annual report or write-up in Value Line,
take time to look at what the company owns.
There
are two types of holdings: tangible assets
and intangible assets.
Tangible
or physical assets include cash, investments, real
estate (land, buildings, forests and oil, water and
air rights), machinery and other equipment. Intangible
assets are non-physical -- the two most important
being a brand name or names and the company's good
will or overall reputation.
If
you have more questions about how to pick stocks,
please write us again.
Good
luck!
|
