Sunday, July 6, 2014

4 Signs to Buy a Stock

Successful stock investing is not a particularly easy thing to achieve. If it were, famous investors like Warren Buffett would be given far less credit for their achievements and fund managers would not be able to charge such high commissions.

However, with some hard work and dedication, anyone can make profitable stock investments. Here are 5 signs to look out for when contemplating buying a stock.

Growing earnings

Over time, the path a stock will be in direct relation to it’s earnings. Earnings are how a company makes money and drives the business forward. If earnings drop the stock price will drop too and if earnings soar then the stock will go up. As an investor, you should look for companies that are able to consistently grow earnings over time. Earnings per share (EPS) is the key statistic that investors use to keep track of earnings.

Good financial ratios

The EPS of a company is just one statistic that investors look at when deciding whether to buy and there are many more. The PE ratio describes the price in relation to the company’s earnings and generally investors look for stocks that have a PE under 25.

Likewise, the PEG ratio compares the PE ratio to future growth. Investors prefer stocks with PEGs that are low. Anything less than 1 could indicate a cheaply priced company.

Strong balance sheet

The balance sheet is another thing investors will look at before investing into a company but you don’t necessarily need to be an accountant to understand one. While balance sheet analysis can get complicated, the key is to measure the ratio between assets and liabilities. If liabilities, are heavy compared to assets, it’s a sign that the company is leveraged on debt.
Not all debt is bad, but too much can be risky. That’s why investors prefer companies with manageable levels of debt. A current ratio more than 1 indicates that a company is fairly well capitalised and free from too much debt.

Heavy insider buying

Financial websites provide a wealth of information that investors can use to come up with good trading ideas and one thing that investors look for is whether company insiders are interested in owning their own company.

When a company director sells a large amount of stock in their company it’s a pretty bad sign and could indicate weakness. Meanwhile, when directors hold a decent percentage of overall company shares it shows confidence in the company and is a positive sign overall.

Successful investing is an art and a science and professional investors will look at all these factors and more before making an investment decision. The key is to do plenty of homework on an investment and keep your risk to a minimum.

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