How to analyse the stock

October 22, 2009

Warren Buffet is considered to be a genius when it comes to stock investment. He recommends an important thing to the investors that the stock (company) you are thinking to buy or invest should have been around for at least ten years. There are a number of factors to be considered befere investing in a stock. This article will help you in understanding such factors.

Techniques to Evaluate Stocks
Following are the things that will guide you in taking an investment decision. They will show you the strength of the financial position of a company. So that it will be easy for you to select a stock and invest in that.

Company History :-
It is better to invest in companies that have in existence from minimum 10 years. Over the course of a decade, many things can happen to a company. There will be good times and bad times for everything. If a company can survive the bad times for at least ten years then they are more likely to handle future bad times with equivalent skill. So if a company has been around for at least ten years then you can choose these companies to invest. But remember along with this you have to consider other factors also.

Dividend :-
A dividend is an amount paid out by the company to its existing share holders. Dividends can be paid out at various times of the year, most of the times it seems to be given out on a quarterly basis. These dividends are especially useful for long term investors because your dividends will compound over a period of time.

Market Cap :-
A market cap is basically how much sales a company will generate in a given year. Invest only in companies with a market cap of a hundred million or more. Anything less than this and the company might go bankrupt if their sales don't pick up.

Cash Flow :-
Cash flow generally indicates how much profit the company makes per year. If the company has a good cash flow then they are more likely to avoid bankruptcy. And it is great news for investors. Banks or other similar financial institutions are examples of high cash flow. This is mostly due to these companies accept deposits and offer loans to people. Financial institutions can be great stocks.

Price Earnings ratio (P/E) :-
P/E stands for Price Earnings Ratio. This generally tells you what people expect from this stock. If the P/E ratio is between 10 and 30 then it is considered a reasonably stable stock. On the other hand, if it is really high then that means people have high expectations on this stock. And if those high expectations are not met then the stock is much more likely to lose investors, which will lead the stock to lose its value drastically, this is something that you don't want to happen. So if the stock has a high P/E ratio just be aware of the possible outcomes. If the stock is above 25 then it is usually considered as high.

Return on Assets & Return on Equity (ROA & ROE) :-
ROA stands for Return on Assets and ROE stands for Return on Equity. Normally, investors like to see both of these figures going up or staying stable over a period of years. If the ROA or ROE is negative or falling, you should think twice about purchasing that stock.

Financial Leverage :-
Financial leverage generally tells us how much the company has acquired in debt. You should try to avoid investing in companies that have a financial leverage higher than 5. But again, it is normal for banks and other financial institutions to have a financial leverage ratio more than 5.

Picking stocks is a difficult work. It takes time and patience to learn all of the jargon and other tricks of the trade. But when the day is done, you'll be glad to see that your hard work is paying off.

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