With the plethora of stocks available out there for investment, choosing the right one can be a daunting task. Nonetheless, if you want to succeed in stock trading, you should know how to choose the right stocks for trading, instead of trying your luck on any other stock you find. Investing your hard-earned money in the right stocks will result in much greater gains.
Here are some tips you should consider when choosing stocks for trading:
Foremost, you need to evaluate the financial health of the company. It is required by law for all public companies to release quarterly and annual reports. You can use this information to assess the profitability of the company. Importantly, you should not pay attention on most recent reports; you should look for a consistent history of financial health, not just in one period. Some things you should assess include whether the company is experiencing revenue growth, if it has any debts, and how much dividend it pays to shareholders.
Next, you should calculate the price/earnings ratio of the stock. The simple method of getting this figure is to start by determining the average earnings per share over the previous three years. This implies adding up the earnings per share for the previous three years and then dividing the result by three. Thereafter, you take the current share price and divide it by the average earnings calculated; that is, share price divided by average earnings. And, if the result of this computation is not more than fifteen, then it is assumed that the stock offers attractive returns. It is worth mentioning that you should not use this tip in isolation; combine it with other strategies for better results.
Another method you can use for getting the best stock to invest in is technical analysis. Basically, technical analysis involves studying the charts to identify potential trade opportunities. If you use technical analysis, it is advisable to combine it with other strategies, such as the ones described above, for your investments to be more profitable. Importantly, you should find a method that best suits your tastes and preferences, instead of trying out any other method you find out there.
In conclusion, investing is not always easy and it is a good thing that you do a thorough background check before investing in any stock. Trying to understand the condition of the company can prove to be the difference between success and failure in the stock market.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.