Searching for the perfect stock can seem like the search for the Holy Grail; near impossible. Being more realistic, looking for a good solid performer should be your goal. Yes there will always be those stocks which double or triple in value in a relatively short time, but these incidents are far from the norm. What you should look for in a stock is solid performance, and good returns.
In combination with some sense of security, you will have a good place to invest your money. Finding that stock can be a challenge, but there are some good ways to narrow the field down. Researching stock can be time-consuming and boring, but in the end will pay off if you make the effort.
Video: How to Research Stocks
Learning the Terminology
Before getting started in stock research, you need to learn the terms used in the industry. There are literally thousands of stock terms, we will start with the most important and basic terminology to use when researching a potential investment.
Accumulated Dividend: A profit dividend that is owed to investors but has not yet been paid out.
Annual Earnings Change: (%) The historical earnings changes between the most recently reported fiscal year earnings and the preceding.
Annual Net Profit Margin: (%) The percentage that the company earned from gross sales for the most recently reported fiscal year.
Annual Sales Change: (%) The percentage change in sales between the most recently reported fiscal year and the preceding. Bear Market: A securities market characterized thus based on declining prices. Bid and Ask: Highest price and lowest price that an investor will pay for a tradable. Bull Market: A securities market characterized thus on rising prices.
Buy and Hold: The acquisition of a tradable for the long term rather than quick turnover.
Dividend: Stockholder payment of a share of a company’s profits.
Historic Volatility: How much contract price has fluctuated over a period of time in the past; usually calculated by taking a standard deviation of price changes over a time period.
Historical Data: A series of past daily, weekly or monthly market prices (open, high, low, close, volume, open interest).
Income Dividends: Payments to mutual fund shareholders consisting of dividends, interest and short-term capital gains earned on the fund’s portfolio securities after deduction of operating expenses.
Investment Clubs: Small, private organizations in which a group of investors, usually novices, pool their time and resources to learn more than they could on their own about various forms of investments and then invest their own money as a group.
Market Order: Instructions to the broker to immediately sell to the best available bid or to buy from the best available offer.
Market Risk: The uncertainty of returns attributable to fluctuation of the entire market.
Market Sentiment: Crowd psychology, typically a measurement of bullish or bearish attitudes among investors and traders.
Market Timing: Using analytical tools to devise entry and exit methods.
Market Value: Company value determined by investors, obtained by multiplying the current price of company stock by the common shares outstanding.
Mean Return: The average monthly total return of a stock. The total return is price change added to dividends.
Price/Earnings Ratio: Stock price divided by annual earnings per share.
Price to Sales Ratio: The price of a stock divided by sales-per-share of the company in the most recent fiscal year.
Quarterly Earnings Change: (%) Historical earnings change between the earnings most recently reported and the quarter preceding.
Quarterly Net Profit Margin: (%) Net operating earnings after taxes for the latest quarter divided by revenues for the quarter.
Quick Ratio: Indicates a company’s financial strength; a company’s cash and equivalent divided by current liabilities.
Range: The difference between the high and low price during a given period.
Relative Strength: A comparison of the price performance of a stock to a market index such as Standard & Poor’s 500 stock index.
Return on Assets: (%ROA) The net earnings of a company divided by its assets.
Return on Equity: (%ROE) the net earnings of a company divided by its equity.
Reward-Risk Ratio: Monthly excess return to risk comparison, calculated by dividing alpha by standard deviation. (A ratio better than 0.4 is excellent.)
Reward-Risk Rank: Stocks ranked in descending order by reward-risk ratio.
Sales Growth: The growth in sales in a company.
Sterling Ratio Method: A measure of risk/return given by:
where:
T = Three-year average annual return
AM = Three-year average maximum annual drawdown. Both Sharpe and Sterling ratio methods compare returns with variability of returns, as opposed to risk of loss of original investment.
Video: Investment Clubs
Learning from Listening to Others
There are many people out there in the very same boat as you buying and selling stocks, looking to make a profit. Message boards, such as Yahoo Finance, are great wells of information. Just look up your stock symbol and see what other shareholders are saying. All numbers aside, how other people feel about the stock in question can sometimes tell you what direction a stock is moving in. Additionally these message boards are a great place to learn about new stocks, from investors just like you.
Read the Hard Data
One place you should always check for accurate data is with the stock exchange sites themselves. For tech trading on the NASDAQ market, visit their page and enter the stock you are researching, for the Dow, go to their page, etc. The information on these sites is not slanted or swayed, just the facts in simple numbers with an industry standardized rating system.
