How to Analyze Stocks (For Beginners)

How to Analyze Stocks (For Beginners)

4 Tips for Analyzing Stocks

If you're ready to invest in individual stocks, then you need to know how to analyze stocks. Thinking that a company is going to do well is no reason to blindly invest in that company's stock. Once you've decided that you want to invest in a company, you need to take a look at how the company is doing, how it has done in the past, and most importantly, what it is planning to do in the future. You then need to decide if the stock is a good purchase based on the current price. Even if the company is going to grow at 25% a year for the foreseeable future, the stock price won't be a good purchase if it's valued like it will grow 50% a year!

The four steps to analyzing a stock are:

Determine how the company makes its money Figure out the company's finances Analyze the future growth of the company Determine whether or not the current price is a good one
Actually, before you start analyzing a stock, you have to do is figure out which stock you want to research! Let's say that I am interested in the (imaginary) company Bill's Brews (BBREWS) after trying their signature Bill's Acorn Ale. I go to a finance website, such as Yahoo! Finance or CNN Money, and type their ticker symbol (in this case, BBREWS) into their stock price widget, and start to do research.

The first thing I want to find out is what all the company is all about. Many companies are diversified and do more than you may know. For example, people know that General Electric makes light bulbs, but they may not know that they also make airplane engines and have a powerful finance arm. In this case, BBREWS makes not only beer, but also a wide range of soda pop. In fact, 60% of revenue comes from soda pop, but only 10% of earnings come from soda pop. In other words, 60% of total sales money comes from sales of soda pop, but only 10% of profits. BBREWS makes much more money for every beer it sells than for every bottle of soda. This may make you more likely to invest in BBREWS, because you see that the product you like - the beer - is the one making money.

Secondly, now that you have a relatively qualitative idea of how the company makes money, you need to get a more quantitative idea. You should find out the price/earnings ratio (the ratio of the stock price to the annual earnings of a stock), the price/sales (the ratio of the stock price to the annual sales), the profit ratio of the company, and comparison numbers for other businesses in this industry. You will also want to get any other financial data from this company that you can get your hands on, but these are the most important numbers for proper analysis of a stock. Average values for these numbers will vary tremendously from industry to industry and depending on which stock sectors are hot, so to tell if the number is low or high, you really need to check out related companies in the same industry. For example, you should compare Bill's Brews numbers to Budweiser, Boston Brewing, and Molson Coors.

Third, you should find out what analysts are thinking about this stock and read their opinions. You should also find out what recent growth rates in profits and sales have been. Check if company insiders or institutional investors, who may have a better idea of how the stock will perform, are buying shares of the stock. If a CEO thinks that the stock of his company is undervalued, he will be more likely to buy it, and if he thinks that it is overvalued, to sell it. Since the CEO probably knows more about the stock than most people, this is a good indicator that it may be undervalued. Analysts also spend long periods of time studying individual firms and finding out if they are overvalued or undervalued. You should also read news reports about the company to see if there are any catalysts for higher than anticipated growth. For example, let's say that Bill's Brews just won an award for "Best American Ale" this year. This may lead sales of Bill's Brews to increase in the coming year.

Finally, now that you have determined all of this, you need to synthesize all of the data to decide whether or not the stock is a good buy. This is definitely more than an art than a science, but you should determine that the numbers you have found make a good investment. One rule of thumb is that the PEG ratio (price/earnings to growth) should be less than 1. In other words, the P/E ratio (found in step 2) should be the same or less than the annual percentage earnings growth rate. For instance, if the P/E ratio is 10 (the stock price is 10 times annual earnings) and the expected growth rate is 15% annually, the stock may be a good buy. If the P/E ratio is 25 and the expected growth rate is 10% annually, it may not be a good buy. However, this is only a rule of thumb and there are many exceptions to the rule.

Now you are ready to analyze stocks on your own. There is nothing like knowing that your investing future is in your hands, and that you will be able to determine when a stock is a good buy and when it isn't. Good luck finding the right stock investment for you!

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How to Buy Shares - A unblemished Beginner's Guide

How to Buy Shares - A unblemished Beginner's Guide

Picking stocks is a lot like buying a car. When you buy a car, you can't just go with the first one that's the right color - you need to know about it. You want to check under the hood, or at least kick the tires. If you don't know about cars, you bring along your brother or your dad or man who does. Most importantly, you take your time. If you're not sure about the mileage or the sound from the exhaust you pass it up and wait for a good deal. It's no dissimilar when you pick stocks.

The first thing you need before you buy shares in a enterprise is a stock trading account. For this, you need a broker. If it's your first time, I propose using a allowance broker. This type of broker will process your buy and sell orders, and small else. Where do you go to find a stock broker? Try your bank. There might be other less expensive options, but your bank is a place you feel comfortable, and you know how it works. Chances are if you have an inventory there they can help you start a share trading inventory well and at a low cost. I trade shares using online banking.

For your first purchase, you want to buy what you know. Look at 3 companies that you like - companies you have bought things from or know population at. Pick up a newspaper and write these four things down:

Price- If the shares are 0 a piece, you might want to skip this one for now. Year's Move (Ym) - This is how much the share grew in value last year, and a fairly good indication of what the enterprise will try to beat this year. Dividend Yield (Dy) - This is a percentage of the value of each share that the enterprise pays to shareholders each year. Some shares don't pay dividends, but make up for it with more increase (if the enterprise doesn't pay shareholders it can spend that money manufacture the enterprise more valuable). Price/Earnings (Pe) - This is simply the price of the share divided by how much the enterprise made in this financial year. This form can be misleading depending on current phase of the financial year, but basically a low Price/Earnings ratio means that the company's stock is valued about right for how much money the enterprise is making.

Either that or the share is undervalued and could go straight through the roof any day now. If the ratio is high it means that the enterprise has a lot of projected growth, but small actual profits so far. This was tasteless while the "internet bubble" when companies had huge prospects but hadn't made any money yet.

Once you have these, it's time to look at some graphs. Go to the company's website, and click on "Investor Relations". Download everything, and look at graphs of their share price and dividend payouts for the last year, 3 years and 5 years.Now read the newspaper. Not the front page, the boring bits at the back about money. Most of these articles are fairly easy to read, and reading them for a few weeks will give you a pretty good idea of what's going on in the world of high finance.

Picking stocks is about more than knowing the company. It's about knowing what's going on in the world that will work on the company. Now it's time to resolve on your goals and make a buy case. First, write what you want out of your investment. Do you want to build capital over 10 years, or do you want to duplicate your money in a year, but with the risk of losing half of it? If you are the former, then you are a increase investor. Otherwise you are a value investor. You might be somewhere in between, but since this is a first buy it would be a good rehearsal to pick stocks according to a definite investment philosophy.

Now your buy case: This is an discussion for and against buying the shares. In it you need to write:

What's going on in the enterprise with regards to new business, new directors, new enterprises, new debt, new acquisitions/sales of subsidiaries etc. What's happening in the world that could work on the company's potential to make money The worst thing you can imagine happening. Think of the one thing that would make your company's stock plummet more than anyone else. As many pessimistic ideas as you can think of for why you should not buy these shares Why you think it is a good time to buy shares in this enterprise now

Lastly, before you buy shares, ask people. Ask man who works for the enterprise or ask an investment advisor, even if you have to pay them. If there is even one factor that you have not considered, your whole share trading palpate could be very painful.

Remember, buying shares is not gambling if you know the rules. Understand your risks, and don't take any you cannot afford to make. Avoid startups for a first investment - save the riskier stocks for when you are more confident.

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