Purpose

The stock market contains the listed shares of thousands of corporations. The respective performance of these companies varies widely and some stocks may perform poorly while others simultaneously perform well. A random selection of stocks can be disastrous for a portfolio. Without some indication that a stock could succeed, a transaction becomes more a game of luck than an informed strategy. Investors gradually become more savvy with the stock selection process but most begin by studying basic factors.

Fundamental Analysis

Many investors rely on criteria related to a company’s fundamentals before they select stocks for investing. Fundamental analysis looks at the core performance and financial health of a corporation to assess its growth and future profit potential. These criteria include the company’s operating cash flow, the return on investment, its revenue and any outstanding debt. The formulas used with these criteria can become quite complex, but in general, a company with little debt, solid cash reserves and consistent revenue is in good health.

Dividend Selection

A stock may pay a quarterly dividend to shareholders. This is a cash deposit that generates income for investors. Some people rely on dividend income to live. There are many ways to select stocks based on criteria that lead to high dividend payouts. A screener could require strong five-year dividend growth combined with high dividend yields. Price-to-earning ratios, or P/E ratios, are often used as criteria in stock selection. This quantitative measurement is the division of a share price by corporate earnings. Low P/E ratios indicate that the stock price is unusually low compared to the company’s earnings. This often signals future growth for the stock. By incorporating these criteria and other similar factors, a stock list may be generated to focus on stocks with growth potential and are already paying solid dividends.

References

Resources

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