Buying a Stock: The 4 main things to look for.

September 14th, 2011 by admin Leave a reply »

Lets assume everyone knows how to buy a stock. Get a broker, pick a stock, and pay for it. How many traders know what they are buying though? Here are 4 important things to look for in a company when you wish to invest in their company by purchasing a stock.

1. Market Cap: You hear the term all the time, but what does it mean. The market cap is the price to buy the company, in a sense. Basically you multiply the amount of shares in the market by the price per share. A 10.00 stock with a million shares in the market would cost 10 mill.

You try and use market cap to ensure your not overpaying for that stock. Find out what the company is worth and what the profits are. I’ve seen companies with the same exact market cap, where 1 company has earnings of a billion and the other 10 million, and they are both selling at the same price.

2. What is the company doing with shares?

If insiders are buying this is a good sign, if they are selling it is bad. Is the company pushing more shares into the market, causing a drop in the stocks price. Or, is the company buying back shares of its own stock, creating a smaller float and driving the price up.

It goes without saying that a company buying and holding on to its shares is a profitable and confident company that has a strong chance to continue to rise in price per share.

3. Why are you buying the stock?

I know why I buy stocks, mostly for good trades and to keep some in the portfolio. Don’t buy the stock because you love there food, clothing, stuff, etc…buy the company because you think it will go up in price and it has strong financials. You can look at PE ration as well as the items we chose for #1 and #2. If you can get a good company at a good price then you have a stock to buy.

4. Hold on for a long time.

Plan on buying and holding on, get the right price and wait. There are people paid to time the market and they continue to get beat by the market average over time. You are not a professional, You will not beat the market either. Just realize that, buy the stock and relax.

Hope some of you find this helpful. Good luck out there, my favorite part of trading is finding those undervalued plays.

Please share with other stock traders!
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