How to Know What Stocks to Buy

Stock investing is one of the best ways to grow your money and earn financial freedom. But that doesn’t mean it’s easy to invest in stocks. You want the highest capital appreciation possible, but unfortunately, risk and reward are intertwined.

How to Know What Stocks to Buy:  What to Look for in a Stock

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Create a logical plan for evaluating stocks and stick to it. Write down your investing goals, how much you can afford to invest, what industries you believe most in, how expert opinions will affect your decisions, and what metrics you want to check for each stock.

Establish a Process

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Always research a company and the industry it is in before you invest in stocks. Don’t just trust a “hot tip,” but instead conduct due diligence. An excellent place to start is by reading the company’s most recent annual report.

Research the Company Before Engaging in Stock Market Investing

Valuation metrics are designed to provide investors with an idea of what a company might be worth. Don’t weigh any metric too heavily, but instead look at the big picture of what a stock’s metrics show.

Evaluate Important Valuation Metrics

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The price-to-earnings (P/E) ratio is the ratio of the company’s share price to its earnings per share. You divide the stock price by the stock’s earnings per share.

Price-to-Earnings (P/E) Ratio

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The price/earnings-to-growth (PEG) ratio is a business’s P/E ratio (explained above) divided by its expected growth rate. You can sometimes estimate future growth based on past growth rates.

Price/Earnings-to-Growth (PEG) Ratio

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A business’s enterprise value is approximately how much it would cost to buy the company. The enterprise value-to-sales (EV/S) ratio compares a company’s total value to its sales, and it shows how many dollars of EV are created through one dollar of yearly sales.

Enterprise Value / Sales (EV/S)

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