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.

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.