There are thousands of stocks available in the share market, but most of them won’t make you rich. Whether you are an investor or trader, you need a way of selecting the stocks that are most likely to increase in value, and this means gaining greater insight than other traders to find the gems amongst the dirt before they do. Whilst there is no guaranteed approach to selecting stocks that will appreciate, there are some basic strategies that you can use to help you identify the likely winners. Read more to learn about these strategies.

1. Check the company background

The future price of a stock depends on the ability of the company to grow earnings and dividends. So before purchasing the stocks, always check the background of the company thoroughly. You should read analyst views on the expected earnings, understand the company’s position in their market and get an overview of their finances, including growth in sales, and debt position.

How promising is the market for the company’s products? Does the company have a sustainable competitive advantage? Are they are market leader in their industry? Do they have a track record of delivering on promises? Are they able to expand their dividends and earnings in the future?

2. Analyze historical price data

If a particular stock shows initial potential, don’t get too excited about it. Give some time for research before purchasing it. See how the stock price has behaved in the last few months. It is strongly recommended that you analyze the data for at least the last 6 months.

This will show whether the stock is in an uptrend or downtrend, and shows how it responds compared to the broader market indices.

3. Identify stocks with a low P/E ratio

P/E or price to earn ratio measures the current market price of a particular stock in respect to the annual profit earned by that share. It is a very effective way to identify the potential value stocks. The higher the P/E ratio is, the more a trader has to pay to buy that stock (relative to expected earnings) and the opposite for the lower P/E ratio.

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Tags: Company background, Data analysis, P/E ratio, PEG ratio, stocks

This entry was posted on Saturday, January 31st, 2009 at 9:41 am and is filed under Trading Rules. You can follow any responses to this entry through the RSS 2.0 feed. Both comments and pings are currently closed.