How to Analyze Stocks

Are you new to investing and would like to learn how to analyze stocks? As far as researching a stock, there are many things to look for, and everyone will tell you something different. Use the following stock analysis test to identify the obvious losers you do not want to invest in. These may be stocks that would be bad news for any investor. Perhaps they’re firms with businesses based more on hype than reality with little or no sales or earnings. Or they could be stocks that simply don’t fit your investing style, e.g., maybe they’re value stocks, and you’re a growth investor.

So how do you analyze stocks? Use the easy stock analysis test to check:

  • Company and Industry Overview

Find out something about the company’s business and its industry.

It may be in a business or market sector that you favor or that you want to avoid. For instance, the home building industry usually prospers when interest rates drop and suffers in a rising interest rate environment. So your take on the future direction of interest rates would influence how you view homebuilders.

  • Market Capitalization

Market capitalization defines a company’s total value (share price multiplied by number of shares).

The biggest firms are designated large-caps, and progressively smaller firms are termed mid-caps, small-caps, and micro-caps. There is no good or bad market capitalization, but each size has its own pluses and minuses in terms of potential risks and rewards. Generally, larger companies are considered safer, and smaller firms offer more growth potential. However, even these generalities vary with current market conditions.

You may decide that a particular company size range best suits your needs or, conversely, that you’re open to all possibilities. Whatever you conclude, eliminate candidates in this step that don’t fit your requirements.

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  • Valuation Ratios

Valuation ratios such as price to earnings (P/E) or price to sales (P/S) define how market participants view your candidate’s earnings growth prospects.

High valuations reflect in-favor stocks, that is, those seen having strong growth prospects, and thus appeal to growth investors. Conversely, value players look for stocks with low valuation ratios, indicating that most market players (growth investors) view them as losers.

Any given candidate will fit into either the growth or value categories, but not both. The valuation ratios give you a quick read as to whether you have a value or growth candidate on your hands.

  • Trading Volume

Trading volume is the average number of shares traded daily.

Low trading volume stocks spell trouble because they’re subject to price manipulation and mutual funds can’t buy them. Here’s where you’ll toss these bad ideas.

  • Float

Corporate insiders such as key executives and board members are restricted as to when and how often they can buy and sell their company’s shares. So insider owned shares are not considered available for trading.

The float is the number of outstanding shares not owned by insiders, and thus available for daily trading.

Acceptable float values depend on your investing style. Large firms typically have floats running from a few hundred million shares into the billions. However some investors seek out firms with much smaller floats, typically below 25 million shares. Since the float represents the supply of shares available for trading, these small floats mean that the share price could take off like a rocket if the company hits the news and the demand for shares overwhelms the available supply.

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  • Cash Flow

Where reported earnings reflect myriad accounting decisions, cash flow is the amount of cash that actually flowed into, or out of, a company’s bank accounts as a result of its operations. Consequently, cash flow is the best measure of profits. Except for the fastest growers, viable growth candidates should be reporting positive cash flow.

Here’s where growth investors should eliminate cash burners from consideration. On the other hand, viable value candidates may very well be reporting negative cash flow resulting from the problems that caused their fall from grace.

  • Historical Sales and Earnings Growth

Whether you’re seeking out-of-favor value prospects or hot growth canchapter didates, your best prospects are firms with a long history of solid long-term sales and earnings growth. In this step, you’ll dispose of stocks that don’t meet this basic requirement.
  • Check the Buzz.

There’s no point wasting time researching a stock if the company’s main product has just been rendered obsolete by the competition. At this point, get up to speed on the buzz surrounding your candidate. Negative buzz is bad news for growth stocks, and you should disqualify such growth candidates.

It’s a different story for value prospects, however. The negative buzz is part and parcel of the market’s disenchantment with the stock, and is contributing to making it a value candidate.

You will eliminate many of your bad ideas during the quick prequalify check, most in less than five minutes once you get the hang of it. Take your survivors on to the detailed analysis.

Which Stocks to Buy?

Need help finding stocks to buy? Isn’t that the question that every trader is asking? Luckily, there are numerous subscription-based and free stock screeners today that can assist you in finding some of the best stocks to buy. These tools help you determine the most profitable stocks available. The challenge comes in getting the most efficient screener that performs excellent task of combining fundamental as well as technical analysis.

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One of the top stock analysis and screener services today is Morningstar. They are a great resource to help assist you in your investment decisions and their stock ratings system is universally known throughout the investment community.
*You can sign up and try the Morningstar with a free 14-day trial membership.

You may need to employ more than one screener. If that is the case, the most effective step to take is to use a technical screener first and then look for fundamental screener. These trading tools will assist you in finding credible information on several penny stocks and help you steer clear of stocks that lack liquidity due to the bigger market players.

Hopefully now you have a better understanding of how to analyze a stock. By learning how you can go about analyzing stocks, it will help you to protect your investments and money today and for the future.
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