How to research stocks to buy

One of the most important parts of 'playing the market' is researching companies.

Instructions

• STEP 1: Obtain corporate financial statements filed with the Securities and Exchange Commission. You can get such documents without charge via www.freeedgar.com.
• STEP 2: Analyze quarterly statements covering two or three years, noting trends in earnings per share and revenue.
• STEP 3: Look for a trend of consistent growth in earnings per share.
• STEP 4: Calculate the company's price-earnings (PE) ratio, a measure of a stock's value. (Divide the stock price by annual earnings per share.)
• STEP 5: Compare the PE ratio with industry norms and with the S&P 500's ratio. The lower the ratio, the less expensive the stock is relative to earnings.
• STEP 6: Beware of debt. Check out the company's balance sheet, looking for the extent of its long-term debt.
• STEP 7: Check cash flow - the movement of cash through the company. You'll want the company to have positive cash flow.

Tips & Warnings

• Make sure the company isn't giving short shrift to its research and development budget.
• Calculate a sales-per-employee figure and compare the company with its competitors.
• Assess management. Find out where managers worked before they joined the company by reading proxy statements, registration statements and annual reports.

Tags: Buy, Research, Stocks

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