How to Choose a Good Stock

The stock market has the potential to bring wealth to investors and traders around the world. However, you can only make huge profits if you are able to find a good stock and to make the best use of your money. How to choose a good stock? This is one of the most frequently asked questions by many investors. Following are the most important tips and things to look for when choosing a good quality stock:

1) Keeping an open eye on the market: You should pay attention to what the market says and keep track of the performance of your chosen stocks. Certain factors such as the quality of company's staff and products, its competitive advantages, reputation and industry attractiveness can play an important role in determining the performance of the stocks.

2) Company background: It is very important to do a background check of the company you are going to invest in. Before choosing a stock, you need to know some details about the company such as the type of business they are in, sources of cash flows, past history, present performance, business plans, etc.

3) Use financial ratios to identify the "true" value of a stock: The Price/Earnings (P/E) ratio is one of the most popular stock market ratios used in determining whether a share is of good value. The P/E is equal to a stock's market capitalization divided by its total earnings. When the ratio is 1, it may indicate that the share price is fair. If it is greater than 1, it may indicate that the stock is overpriced. If this ratio is less than 1, it is considered a good buy (it indicates that the stock is under-priced and has good potential for growth).

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