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How to Buy Good Stocks

by Carmelo J. Montalbano

  • Overview

    Buying good stocks is a matter of understanding the factors that indicate a company has the financial strength to pursue its sales goals. Investors must use research to evaluate management and the available market for sales growth.
    Buy Strength, Sell Weakness
 

  • Step 1

    Buy good stocks by diversifying your choices among each of the sectors of the Standard and Poor Index. There are nine sectors. Each stock is ranked by analysts by their year ahead expected performance. See Resources for stock ranking service.

  • Step 2

    Buy stocks that have a five year history of positive earnings growth, cash flow growth and increased book value. Study whether analysts believe earnings can be maintained or increased for the future three- to five-year time period. Book value is all assets minus all liabilities.

  • Step 3

    Compare the price-to-earning (P/E) stock ratio of the subject company and its competitors. P/E ratio is the stock price divided by the expected year ahead earnings. Divide the price earning today by the analyst's estimates of the P/E ratio in five years. If the result is less than one the stock may rise in value due to higher earnings and higher quality of earnings.

  • Step 4

    Often cheaper companies can be found by examining a smaller company that is still growing into larger markets with new products. Small cap stocks represent young companies with high growth prospects. Mid cap companies are over $1 billion in size and large caps exceed $5 billion in size and have strong finances and worldwide markets.

  • Step 5

    Avoid buying stocks at market tops. Buy stocks that are above the 200 day simple moving average. Moving averages are computed by averaging the last 200 days of stock prices and comparing the result to the closing stock price. Buy stocks with long term prospects and avoid day trading. Never let small stock losses become large losses. Sell stocks that fall more than 10 percent below your purchase price.
  • 4
  • Spreadsheet or calculator
  • Spreadsheet or calculator
  • Use library resources for current stock publications.
  • Use library resources for current stock publications.
  • Always test trading theories before investing real dollars.
  • Always test trading theories before investing real dollars.

References & Resources

     
     
 
 

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