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How to Select Stocks for Investment

There's no foolproof way to pick a winning stock, but these tips will help.

Instructions

  • Step 1: Check the return on equity when selecting stocks for investment -- that is, a year's worth of a company's earnings divided by the average shareholder equity for that year. An ROE of 20 to 30 percent is optimal.
  • Step 2: See if the company has cash on hand. It doesn't matter if they're carrying some debt -- most firms do -- as long as they also have money in the bank. All the information you need to evaluate a stock is online so start searching!
  • FACT: America's first organized stock exchange opened in Philadelphia in 1790.
  • Step 3: Consider the price-to-earnings ratio -- the stock's price divided by the past 4 quarters' per-share earnings. A stock with a low P/E ratio is a potential bargain.
  • Step 4: Look for companies with solid profits. Invest in a company that isn't just showing a profit, but _increasing_ profits.
  • Step 5: Select stocks for investment from companies whose revenues are growing -- an especially good sign in a weak economy.
  • TIP: The best growth comes internally, from increased sales, rather than externally, from acquiring another company.
  • Step 6: Pick a company that makes a product or offers a service. Firms that sell a concept -- like a promising drug that's still in development -- are far riskier because they could come up empty-handed.

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