The most important thing to do as you prepare to purchase stocks is to gather as much information as possible. Know that you will make mistakes. Even the best investors make mistakes and buy stocks that flop. Start small and give yourself time to learn and have fun. Hopefully you will find that one stock that will change the world.
Determine what you hope to get from your investment. Are you looking for a long-term investment that will have steady growth and low risk? Or are you looking for high growth potential and not worried about the risk? This decision will determine where your investing will take you, so make sure you have a good understanding of what you seek before you proceed.
Look for stocks across different sectors so you may develop a balanced portfolio. There are 12 sectors in the U.S. stock market. If you invest too heavily in one sector and it declines too rapidly, you would have nothing to offset the losses.
Make a list of stocks to research. Good websites for gathering data are Google Finance, Yahoo! Finance, MSN Finance and Motley Fool.
Read articles online to identify stocks of interest.
Create a column and list your stock of interest, leaving plenty of room beside each for the data documenting your research: earnings, P/E ratios, stock ratings, debt, dividends and stock charts.
Compare earnings for each quarter to those for the same period a year earlier. Note any increase or decrease.
Examine the P/E — price-to-earnings—ratio of each company. The P/E ratio tells you whether a stock is overvalued or undervalued based on the company's earnings. Compare the P/E ratio of the company to the P/E ratio for the industry. A company with a higher P/E ratio than the industry average typically means you are paying an inflated cost because of other investors' opinion of the stock.
Evaluate stock ratings to see what analysts or other investors think of the stock. However, always remember that ratings fluctuate up and down frequently. MSN has a good stock rater called "Stockscouter." Look for "sell," "hold" or "buy" ratings by analysts. Motley Fool Caps is a website that allows other investors to rate stock and it shows you how outside analysts rank the stock.
Compare each company's debt to the industry standard. Look for companies that have a debt ratio at or below the industry average.
Note dividends. A dividend is a payment that the company makes on a quarterly basis from its profits. Dividends are paid in cash or stock.
Examine the stock chart is important. Whether you are looking for high growth or a more stable stock will determine what you are looking for when you look at a stock' s chart. For high growth potential, look for stocks that are trending upward over the last year or longer with no sign of leveling off. For lower-risk stocks the charts may look a little more flat, but they should still show a positive stock price increase rather than decline.