Finding Good Stocks to Buy-
Five Things to Look For

Stock market investors are trying to find good stocks to buy before the other stock market investors find them. Given the laws of supply and demand that apply to the stock market, which is a very efficient market, you want to buy “undervalued” stocks. Ideally, the demand for these stocks will increase after you have purchased.

With those basic principles in mind, here are some of the signs of a good stock to buy.

Strong Earnings Growth - Earnings are the reason the business exists and are typically the most important drivers of a stock’s price. Defined as the company’s revenues, less its cost of sales, operating expenses, and taxes, for a defined period of time, earnings give an indication of the future dividends investors can expect, its potential for growth and stock price appreciation. If you were to research the historical relationship between earnings growth and stock price appreciation, you would find a strong positive correlation.

Market Leadership - Market leaders- those companies with the largest market share in their respective industries- may have achieved price control and significant advantages with regards to economies of scale, production, and delivery. These companies have often created an advantage for themselves that they can enjoy for years to come.

Steady/ Increasing Return-on-Equity (ROE) – One of the most important profitability metrics, the ROE measures a corporation’s profitability to reveal how much profit it generates with the money invested by shareholders. As companies earn money, it is paid out to shareholders or it goes into retained earnings for the company. Strong, consistent ROE demonstrates sound financial health.

Solid/ Improving Productivity - Productivity measures vary from industry to industry. Manufacturers, for example, will look to increase the volume of the product they are producing while minimizing production costs. Across industries, though, companies will look to generate more sales and profits for the assets they employ. An indicator of how profitable a company is relative to its total assets. The return-on-assets (ROA) offers an indication of how efficient the company is in using its assets to generate earnings.

Good Value - Valuation is the investors attempt to determine the worth of a share based on company fundamentals. Value investing is about finding stocks that the market has not correctly priced as their perceived, “intrinsic” value is greater than the current market price. If the company’s fundamentals are sound, but the stock’s price is below its value, you may have found a good investment candidate.

More about finding good stocks to buy

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The above information is educational and should not be interpreted as financial advice. For advice that is specific to your circumstances, you should consult a financial or tax advisor.

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