Stock Trading - How to Pick Stocks For Long Term Profits
January 4th, 2008 by admin
If you are lucky enough to have enough capital available to start investing in the stock market and generate yourself some serious cash flow but if you do not know how to pick stocks then you are going to run out of money very quickly.
When evaluating stocks there are some set formula to make the job easier, here are the three points I use when deciding if a stock is worth investing in or not.
First I look at the EPSGR. This means the Earnings Per Share Growth Rate and is an incremental value of the Earnings Per Share or EPS at any specified time frame, this is generally completed on an annual basis. In lay man’s terms the stock with the highest EPSGR has shown more growth in the current year than that of any other related stock. I look for stocks with a EPSGR of at least 10%, this gives a good indication that the company in question offers in demand products and economies of scale.
Every stock I look at must have a proven minimum 10% ROE or Return On Equity. The ROE is a direct comparison between the company in questions net profits in relation to the shareholders equity. The ROE gives you a good indication of how much you would gain if you decided to invest in the stock. If the company you are interested in has more than 10% ROE then they are able to utilize their shareholders money to maximize profits. It does not make good sense to buy stocks with a ROE of less than 5% as the same return is possible in a normal, zero risk investment.
I will never go for a stock with a Debt to Equity ratio (D/E) of more than 60%. The Debt To Equity ratio can be calculated by simply dividing the companies total debt by the total equity sum. If the company is heavily funding its operations with debt its D/E will be greater than 1. This enables you to look at how the stock will fair should the interest rates continue to rise. It goes without saying if the company cannot afford to pay its debts then its stock is going to be next to worthless.
While you are learning how to pick stocks these pointers will keep you in the black so long as you follow them without deviation. The only real way to learn how to pick stocks is to get out there and get your feet wet. Of course do not go crazy, just follow the advice given to you by your broker and you wont go far wrong.
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Posted in Long-Term-Investment |