Step 1: In order to know which stock you want to buy, you must first decide how much time you have to spend doing research. There are some very important things to consider. Earnings. Does the company consistently beat earnings estimates? How is their outlook for the current quarter and year? On Yahoo Finance, after you type in the symbol for a stock, on the left there are many options helpful for research. One is “Analyst Estimates”. This will show what the experts that cover the company think the company will earn during the current quarter and current year. One thing that I like to look for is if the estimates are being raised, which means that the experts covering the company think they will earn more than they previously thought. Another popular factor in determining whether or not to buy a stock is the PE ratio (Price to Earnings ratio). The way to find this number is to divide the price of the stock by the amount it earns per share (ex.: Microsoft’s stock is at $28.28 and its earnings per share for the year is $1.76 per share. The first divided by the second gives a PE ratio of 16). Some people say that a ratio of 20 or lower is ideal; others have different opinions.
Step 2: The strategy I use, as well as others, is slightly different. To me, it makes sense to buy a company for how you think it’s going to do in the future, considering both the company’s earnings and it’s plans to grow. There is a ratio called a Forward PEG ratio that gives a good barometer of this. It takes the current price of the stock, divided by how much it plans on earning per share next year, divided by how much it plans on growing next year. For Microsoft this number is about 1.04. If the number were near 2, I would probably not consider buying it. But if it is less than 1.5, I will definitely look into it. To me this makes sense, especially if you plan on holding the stock for more than just a few months, because it gives you a good idea of where the stock might be headed.
Step 3: Another essential part in researching is to read the news stories about the stock you want to buy. I would read every news story about each stock you’re considering every day. This is very important because it will give you all the necessary current news that all the big time traders have access to, and it will help you make a better informed decision about the stock. The annual and quarterly reports are also extremely beneficial if you have time to read them. These are submitted by the companies themselves, explaining their current performance and what they plan on doing in the future, whether it be introducing a new product or service, or perhaps acquiring another company. Again, all these things are available through Yahoo Finance and other free services.