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Sri Lanka Equity Forum » Stock Market Talk » How to Choose a Stock

How to Choose a Stock

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1 How to Choose a Stock on Sat Jan 12, 2019 9:35 pm

ruwan326

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Senior Vice President - Equity Analytics
Senior Vice President - Equity Analytics
How to Choose a Stock Rolling Eyes Rolling Eyes Rolling Eyes
 
 
 
 
1.Consider price and valuation.
 
Investment pros often look for stocks that are "cheap" or "undervalued." Generally, what they mean is that investors are paying a relatively low price for each dollar the company earns. This is measured by the stock's price-to-earnings ratio, or P/E. (calculate it yourself by dividing a company's share price by its net income.) Very roughly speaking, a P/E below about 15 is considered cheap, and a P/E above 20 is considered expensive. But there's more to it than that:
 
 
 
 
2.Know what kind of stock you're talking about. 
 
A company that's expected to grow rapidly will be more expensive than an established company that's growing more slowly. Compare a company's P/E to other companies in the same industry to see if it's cheaper or more expensive than its peers.
 
3.Cheap isn't always good, and expensive isn't always bad. 
 
Sometimes a stock is cheap because its business is growing less or actually slowing down. And sometimes a stock is expensive because it's widely expected to grow its earnings rapidly in the next few years. You want to buy stocks that you can reasonably expect will be worth more later, so look at value combined with expectations for future earnings.
 
 
 
 
4.Evaluate financial health. 
Start digging into the company's financial reports. All public companies have to release quarterly and annual reports. Check the Investor Relations section of their web site, or find official reports filed with the https://www.cse.lk/home/market. Don't just focus on the most recent report: What you're really looking for is a consistent history of profitability and financial health, not just one good quarter.
 
5.Look for revenue growth. 
Anything can happen day to day, but in the long run, stock prices increase when companies are making more money, which usually starts with growing revenue. You'll hear analysts refer to revenue as the "top line."
 
6.Check the bottom line, too. 
The difference between revenue and expenses is a company's profit margin. A company that's growing revenue while controlling costs will also have expanding margins.
 
7.Know how much debt the company has. 
Check the company's balance sheet. Generally speaking, the share price of a company with more debt is likely to be more volatile because more of the company's income has to go to interest and debt payments. Compare a company to its peers to see if it's borrowing an unusual amount of money for its industry and size.
 

8.Find a dividend. A dividend, a cash payout to stock investors, isn't just a source of regular income, it's a sign of a company in good financial health. If a company pays a dividend, look at the history of their payments. Are they increasing dividend or not?

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