Top 5 things to consider when buying a stock

When people first look at a particular stock, they are faced with the ultimate question of "should I buy or should I not?.
When they finally jump the "buy" fence, they are then faced with the question of wondering when to sell. If they didn't buy it, they will still watch it anyway just to confirm their decision.

So to help you in your journey and your confidence in our own decision, I've compiled a list of things to consider when buying a stock. Of course this also depends on your trading style. The list of the following applies for a hybrid of long and short term trading of stocks.

1) P/E ratio. Price to earnings ratio.

This ultimately represents the risk involved with purchasing the stock. What does it mean? Well it means exactly what it says. It is a ratio of how many times a stock's price is above its earnings. For example, if a stock has earnings of $1/ share with a p/e ratio of 10. The price of the stock will be $10. This means the price is worth 10x more than their actual earnings.

Why I use this? It helps me assess the riskiness of the stocks I am considering.
This lets me know whether there is potential for a stock to fluctuate largely and the potential for loss which are both based on investor sentiment. A stock's price should be worth their total assets/ earnings which is a p/e ratio of 1. However, due to the laws of supply and demand, the stocks price is actually a combination of the supply of shares and all their assets/earnings which ultimately can lead the stock to rise or fall based on the amount of available shares still trading in the market; when investors buy shares the price goes up because there is less supply left and vice versa. A good example of this is berkshire. The lower the ratio, the less likely it is for you to lose a chunk of your coin. So I generally pick a stock that is between 1-15 with their p/e ratio. This generally tends to be the average for most large companies that have reached dominance. This is why I choose this range. It gives me some security that these stocks aren't going to disappear or lose significant value in a short period of time.

2) price to book value

This is the price of the stock in relation to all of its assets. This means that in the event the ceo shits the bed and causes the company to go all chapter 11 (bankrupy), the company will have to sell everything they own in order to pay their debt. The value per share generated by this is what the company is actually worth in the event of a liquidation of their shizz. Can anyone say firesale? To explain this a little more, imagine having to take take a computer you built apart and sell each individual piece on ebay. Well thats what its like. The total money earned through that sale is the book value.

3) also a given, EARNINGS!

make sure the company is earning a profit or if they are relatively new and still have negative earnings, make sure their profits are growing; even if they are at a negative balance. The growth in their earnings will show that their organization has potential to be profitable. Also companies with negative earnings that are increasing may also be undervalued. This means you can get a great deal on a stock that has potential to double or even triple!

4) Volatility

The reason i look at this is because I am
A short term trader. I like to profit on price movements in either direction. Ideally you will buy when it drops x amount of dollars and sell when it peaks at x dollars. I look at this because it allows me to avoid getting into stocks that aren't stagnant. It instead gives me the opportunity to profit off the cyclical price movements. Combining this with growing/consistently stable earnings implies that the changes in stock price are not due to an unhealthy company, but instead are due to cycles in the market or just day to day trading that occurs. For example, during the christmas months, sales rise; and during the non christmas months, sales tend to decline. This will obvioulsy have an effect on the stock prices for the big retail players in the market. This should also be pretty self explanatory.

5) Dividends!

The last thing I look at, assuming everything else meets my criteria, is the dividend. This low risk strategy allows me to gain even if I bought at the wrong time! Dividends are kind of like a "thank you for believing in us" gift from the company; but instead of a loot bag, they give you a bag of money.... More or less. Every quarter or monthly or whenever they feel, a company will pay its investors a tiny sum of money just for holding the stock. So I pretty much buy stocks that consistently pay dividends as a form of security in the event that a stock drops for some reason. This way you can still gain and earn a bigger % when the stock finally does recover! I usually aim for 5% and more. Just a personal preference.

So there you have it, 5 things that you should consider when buying a stock!
Of course the real trouble is figuring out when to buy and at what price. This is the one thing that eludes everyone. So if you know of a way, I'd love to hear it! When a stock bottoms out? my guess is as good as anyone elses. I usually just go based on what I am comfortable paying. A general rule of thumb is to pick companies that you are familiar with and like.

Happy trading !