How to Research Stocks to Buy

by Contributor ; Updated July 27, 2017

Items you will need

  • Internet Access
  • Computers

How to Research Stocks to Buy. One of the most important parts of 'playing the market' is researching companies.

Step 1

Obtain corporate financial statements filed with the Securities and Exchange Commission. You can get such documents without charge via www.freeedgar.com.

Step 2

Analyze quarterly statements covering two or three years, noting trends in earnings per share and revenue.

Step 3

Look for a trend of consistent growth in earnings per share.

Step 4

Calculate the company's price-earnings (PE) ratio, a measure of a stock's value. (Divide the stock price by annual earnings per share.)

Step 5

Compare the PE ratio with industry norms and with the S&P 500's ratio. The lower the ratio, the less expensive the stock is relative to earnings.

Step 6

Beware of debt. Check out the company's balance sheet, looking for the extent of its long-term debt.

Step 7

Check cash flow - the movement of cash through the company. You'll want the company to have positive cash flow.

Tips

  • Make sure the company isn't giving short shrift to its research and development budget. Calculate a sales-per-employee figure and compare the company with its competitors. Assess management. Find out where managers worked before they joined the company by reading proxy statements, registration statements and annual reports.

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