Knowing the principles behind what stocks to buy means the difference between becoming extremely wealthy or possibly losing everything. The challenge with finding these principles is not that there are secrets about choosing stocks but rather there is an abundance of incorrect guidance.
Wall Street and other international stock exchanges want everybody on Main Street to invest their money into stocks and bonds and never take the money out. This is the same method that makes banks and stockbrokers rich while leaving average investors often suffering losses.
If instead of following the advice of so-called market gurus we use timeless principles for deciding what stocks to buy, when to buy, and when to sell, we improve our chances of being profitable.
Stocks are evaluated based on a price to earnings ratio. If the stock you are interested in has no earnings then you are speculating on the stock. Either a technological discovery, resource discovery, a profit turn-around or something else that is not easy to predict has to rescue the stock into profitability. Steer clear unless you understand the market and the stock precisely.
For stocks that have a price to earnings ratio, the best investments are generally when the stock is relatively cheap historically. For most of the US market, a reasonable price to earnings ratio was around 8. When the market is expensive the price-to-earnings ratio for the S&P 500 may go over 15.
Find stocks that have lower price-to-earnings ratios and sell them once the price-to-earnings ratios reach or exceed historical norms.
The best investments are ones where you understand all of the competitors and the reason why you chose that particular stock in the market. For an investor that works in a retail store, they may know which stores are consistently successful and hard to compete with. It follows that those stores may be better stock investments. The same principle applies if a person works in the automotive industry.
Buy stocks in markets and with companies that you know the details and why they are leaders.
When a company is profitable and paying dividends, it is about 75% of the way towards be a good stock to buy. The last 25% requires that the company is growing and increasing its dividend. Dividend payments confirm that the profits the company is earning are real. Growing those dividends confirms that the profits and the top line sales of the company are increasing over time. These two growth indicators confirm that the company is healthy.
It may take time for the stock market to acknowledge the performance of a company like this, but eventually the market will.