Stock Helper

Pick Better Stocks in 10 Easy Steps

Step 7: Decide whether to buy

Enter the ticker symbol of the stock you are researching in this box and press Go. The links in this step and subsequent ones will automatically be customized for that specific stock.

Enter Ticker:

Once you've finished steps 3-6 for all the stocks on your list, it's time to decide which, if any, are worth buying.

Compare value to price.

Price is what you pay. Value is what you get. Price is easy to determine: it's the stock quote you can look up on virtually any investment site. Value is hard to determine, and is what all the steps above were leading to. Most investors try to find stocks for which the perceived value divided by the price is as high as possible. You can consider price and value either on a per-share basis, or for the overall company (the two methods are equivalent). For the overall company, the price is called the market cap, and it equals the price per share times the number of shares outstanding. In addition to market cap, we also recommend looking at enterprise value, which is the price you'd have to pay to buy the business itself, after adjusting for cash on hand and any debt it has. (Yes, the name is confusing, since it's really about price and not value.) Of course, you shouldn't buy every stock you find that has a perceived value above the price. Instead, look for those with the biggest differences, giving you a large margin of safety in case some of your guesstimates are a little off.

On the other hand, if you find that the price is substantially higher than the value, and if you're not risk-averse, and if you are an experienced investor, you might consider selling short. (We don't recommend this for beginners, due to the potential for unlimited downside.)

Decide if it's the right time to buy.

Here are some considerations about the timing of a trade:

Recent price movements: One good strategy is to try to buy on a dip, especially a dip that wasn't caused by any specific negative news. Stock prices usually move the right direction based on news (e.g. up on good news, down on bad news), but often the wrong magnitude, and this presents opportunities.

Price/value relative to this stock's historical averages: Some investors, such as value investors, find it useful to compare valuation ratios such as P/E for a given stock over time, to see if the stock is cheaper or more expensive based on that measure now relative to the past. Don't rely solely on relative measures; it's possible that a stock that was ridiculously overpriced before seems relatively cheap now because it's only somewhat overpriced. Also, since a company's expected outlook is factored into the price, it's natural for a company to have a higher P/E when it's growing quickly and then a lower P/E once growth slows.

Bid/ask spread: Keep in mind that when you trade, in addition to paying a commission, you should also factor in the hidden cost of the bid/ask spread. Although the absolute price matters more than the bid/ask spread, for thinly traded stocks (i.e. stocks with low trading volume) and stocks with a low price per share, the bid/ask spread can have a larger negative impact on your investment performance.

Beta: The higher this number is, the more volatile the stock is, and therefore the more opportunities a patient investor should have to buy on a dip.

Dividend dates: For companies that pay dividends, it's important to know the size of the dividend, when the dividend is being paid, and to whom. On the "declaration date", the company sets the amount of the dividend and the "ex-dividend date". If an investor does not own the stock before the ex-dividend date, he or she will be ineligible for the dividend payout. In addition, for all pending transactions that have not been completed by the ex-dividend date, the exchanges automatically reduce the price of the stock by the amount of the dividend. So if a stock drops (let's say) 10 cents per share that day and the dividend is ten cents per share, then the stock isn't really any cheaper than it was the day before.

Optionally, consider timeliness from a technical analysis perspective.

Although we don't recommend it for beginners, if you are experienced with technical analysis, you may want to include technical analysis techniques into your evaluation.

Also remember that successful investors are patient investors. There's about a 50% chance that the stock will be even cheaper tomorrow. Of course, it might go up and you might miss out. But as Warren Buffett has said, investing isn't like baseball; there are no called strikes, so you should feel free to wait for the perfect pitch.

For stocks that don't have a sufficiently large margin of safety between price and value, set up alerts to notify you by email if and when the stock falls to a price you think it's worth buying at. In general, if you didn't buy, and a stock goes up on no news, you should be less inclined to buy (unless you're a momentum investor). If you didn't buy, and a stock goes down on no news, you should be more inclined to buy.

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