4 Steps to Pick a Stock

With a vast amount of information from the financial media and websites it is very difficult to come to a conclusion on taking a decision on the stocks to buy this is global economy.  But, you can follow certain steps to create a screening process to come to manageable number of ideas from the large universe of ideas that merit further investigation.

Pick a Stock :: Step 1 – Broader View : A lot of investors start their search with an industry that has fair chances for growth. For example, some investors concentrate on real estate stocks as they believe the real estate is always a growing business with a populating world with limited living space. Those dreams didn’t went true for many years. The health care sector was also considered the same in 2000s, as more and more people are becoming aware of the health and nutrition importance. You need to have broader view while choosing the stocks.

Pick a Stock :: Step 2 – Company Statistics : Many investors choose companies of particular size they are comfortable with. Number of shares outstanding multiplied by the current stock price is a common measure of the company’s size. Generally firms are categorized as large, mid, small and micro-capitalization, depending on the outstanding value of the company stock. Lot of investors are familiar with mid and large-cap companies. Companies like Pfizer, Proctor and Gamble, General Electric (NYSE:PFE, NYSE:PG, NYSE:GE respectively) are examples of such familiar stocks.

Investors need to review the companies characteristics very carefully, the industry the company is into and its growth potential. If the industry is in the early stages, you may expect very high growth in sales and earnings. At the same time you need to calculate the risk involved. Mature companies are expected to display steadily rising rate, but at slower rate.

Pick a Stock :: Step 3 – Constructing the Screen : There are some good professional software packages available in the market for screening. Some public websites and brokerage firms also offer this information. You need to determine your investment goals, tax implications, risk tolerance and time horizon. Once these goals are determined properly, you can select the criteria parameters to be used in the screen.

Pick a Stock :: Step 4 – Narrow the Output : Even after following the above 3 steps, you need narrow the list again. It gives further scrutiny about the companies such as social and personal concerns, comfort level with the industry etc. A deep analysis of the company has to be performed with the publicly available information, from the companies and the investors websites.