How to Buy Stocks

By Jonathan Burton
MarketWatch
 

"Pick a stock, and someone out there will be able to spin a story about why it's attractive," said Doug Couden, director of equity at investment manager Seneca Capital Management.

What to Watch For:
 

Stocks need a catalyst, a spark to get them moving. Maybe it's a new product, a management change or gaining market leadership. Being in a hot sector helps, but don't count on a rising tide to lift all prices.

"A company in a good industry isn't necessarily a good stock," Couden added. "It pays to do homework."

Professional investors follow myriad sleuthing methods, from computerized screening programs to gumshoe field work. Check out the American Association of Individual Investors, which features several dozen screening programs on its Web site, www.aaii.org. For both custom and ready-made screens, try Web sites like Morningstar.com and Zacks.com.

Here are two buying tips from the pros:

Compare a stock's price to its expected earnings-growth rate. The price-to-earnings-growth ratio, or "PEG," should be at or close to 1.0.

For example, a stock at 30 times earnings may seem overpriced if the average company in the industry commands a price-to-earnings ratio, or "P/E," of 20. But if analysts expect 30% earnings growth for the company over the next year, a PEG ratio of 1.0 is eye-catching.

"It's the biggest metric we look at," said Alec Young, an equity strategist at Standard & Poor's Inc. "A company may have a high P/E, but, until you know what the earnings growth is, it's hard to ascertain whether the stock is attractive or not."

Also, study the corporate balance sheet, a financial summary that -- along with the cash-flow and income statements -- reflects the quality of earnings. These documents tell you whether management makes, spends and invests shareholders' money wisely. Company Web sites should post 10-Q quarterly reports and 10-K annual reports, or the Securities and Exchange Commission Web site, at www.sec.gov, offers these and other informative disclosures.

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[此贴子已经被作者于2006-12-11 21:28:09编辑过]