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 !

My experience in the market

First off, I'd like to make it clear that, while I do intend to provide trading ideas, strategies, and stock recommendations. I am just providing them as a resource that you can consider and reference. You are responsible for your own trades and all the risks involved.

So let me start with an introduction. I'm Jonathan. I know that we live in an age where people want information in a real-time basis and want to skip the mumbo jumbo internet jargon of the internet. Everyone wants the quick and easy solution. Well, let me make this clear,  trading the market is not something you can just enter and make money quickly. There is a learning curve. It takes a long time to become proficient at trading, and even a longer time to become good. Even the most successful traders (Warren Buffet) only averaged about 20% a year; however, he did other things as well to get rich. So, before jumping in, make sure you do your RESEARCH and know exactly why you're buying what you're buying and more importantly, know the RISK involved.

My Successes and Failures:

I started off at the age of 19 with about $500. I didn't have some giant trust fund or anything like that or an investor parent telling me what to do. I started off with $500 dollars flat, with an eagerness to learn and a desire to get rich, the latter was my main perogative though. Fast forward 2 years, I am sitting on about $25,000 in the bank. Impressive eh? I thought I was kingshit and definitely on my way to being the next Buffet; but, the market has a funny way of humbling you. With the recession of 2008, my portfolio tanked. Combining that with paying off my car,other expenses, and trips, I was left with about $4500. So overall I'm still up, but from this experience you can see how quickly it is that the tides of stock movements can change. 

My trading arsenal for that period: A mix of US and CAD stocks. Hindered with a $30 commission per transaction.

BMO
RIM
CNQ
COS.UN
F
WLP
TD
BNS
WIN
And Some others. Can't remember them. I'll add to the list as we go on.

My strategy: Small gains add up to Big returns. This is basing everything on price action. This also isn't knew information. I'm sure you can find this somewhere in the world wide web.

Example: Say you start off with $5000. It's fair to say that you can trade 100 shares of most mid-large cap companies right? Now lets make another assumption and also assume that the average mid-large cap company has a fluctuation range (I'm sure theres some complicated stock term for this or symbol), of $1 plus or minus, in a relatively stable market; this can be daily/ weekly/ bi-weekly.This presents you with a possible profit margin of $1 - commission rate per share.

Now lets make some logical probability statements:

1) Hitting =>$1.00 - this will probably range from 10-15%
Why? You need to have perfect entry points, perfect exit points and knowledge of news coming out and also the details of the news in order to determine the actual movement. The latter two probabilities are more likely to occure, just on the frequency of occurences. If you see the example of BMO below, you can see what I'm referring to.

2) Hitting= >0.60 cents 30-40% - Another rough estimate of percentages. Could be more or less, but this is based off my experiences and successes.

3) Hitting =< 0.5 cents 55-60% - Also based off experience.  #2 and this one are our targets because this significanty increases the probability of us hitting.

Estimation of your potential return on $5000 investment x 100 shares: 
lets also give us a 10% margin for error, that is, whatever we estimate we will subtract 10% just to be safe.  These numbers are just estimate numbers and examples of what you could be making. You can obviously make a lot more and also a lot less.

Apply probabilities (use lower range) exclusive to each period
1) 365 days in the year. Trading day to day.
a) $1 = 10%, 36.5 days of the year you'll make that $1. So thats  36.5 x $100 ($1x100 shares) = $3650(Max). That means you're hitting $1 about 3 times every month. So lets reduce to about 1 times = 3650/3 = $1216

total earnings = $1216  - commission (12x 9.99x2 = 239.76) 
= approximately $976/$5000
= 19.5% Return

b) estimate 0.75+ = 30%, 109 hits in the year. So that is 0.75 x 100 shares x 109 hits = $8175 (Max). This is hitting 9 times every month. So lets say that your win rate is 30-40% of that as well per month just to be conservative, 3 times, which isa bout 1 per week. So thats still about $2452 every year.
 
total earnings: $2452 -  commission (36 x 9.99x2 = 719.28)
= 1732.72/5000
= 34.6% Return

c) estimate 0.50 and under =60%., 219 hits in the year. So, 0.5 x100x 219 = $10,950 (Max). You need to hit 18 days every month. To make this amount. However, we know that you probably wont make that amount every month, because that means you'd have to trade about 4 days out of the 5. When in reality you'll likely be trading once a week or twice a week at most. So lets just say you make 1 trade every week at a gain of 0.50 cents. That's approximately $2737.5

Total earnings: $2737.5 - commission (48x 9.99x2 = $959)
= 1778/5000
= 35% return. 

Now all these numbers are just hypothetical, but you can see how quickly it can add up and how reasonable it becomes. Even if you only hit 50% of the time thats still upwards of 15% a year return. As long as you keep putting money in, the amount it grows by becomes quick. So if you were to break this into year one , year two , year three and etc. Putting away 5000 every year, plus earning with trades. Within 3 years time you can be sitting on upwards of a 50% return on your investment. Your $15000 book value would be worth by the end of year 3, approximately $26,000. Now imagine you continue that for a total of 5 years?


Of course these price movements are all relative to the stock itself and the volatility of it.
 Example BMO of 2012. see chart below. You can clearly see that this has a $1 range over a 14-day period and approxaimtely 0.25-0.50 range every few days.

So the probability statements are generally true.

$1- price movement happens once in 14 days
0.25-0.5- happens about 8/14 days = 57% .  (count all the times it touches the EMA 200,EMA 50)

 ** So lets wrap this up. In the market, someone has to lose, so our goal is to just not be that person. There are millions of other people you can beat. Finishing Second and third are both still good. You know the saying, "When you're being chased by a bear, you just have to out run the guy next to you?" The stock market is the perfect example. Just make sure you run faster than the bull.

Give me some feedback! Topics you want to cover or even hate mail. I'll gladly engage in a flame war. Enjoy! Hope this opened your eyes just to how much money is sitting out there.