How to Evaluate a Stock's Potential
Original post by Jade Balle of Demand Media
A stock’s future performance lies in the performance of the company and also the confidence of investors in the company’s future. New product releases, company management changes and general economic changes might affect a stock’s performance. Since you cannot predict the future, you cannot predict a stock's movement in the short and long term. However, you can still try to evaluate a stock’s potential through research.
Subscribe to a website that provides financial news and stock performance updates. Add the stock symbol to your portfolio for review to see how the stock price moves from day-to-day before you invest.
Review the stock’s past performance using your online stock information service. Check the performance over the past month, quarter, year, three years and five years. Note specific times in the stocks history when the stock either surged or went down suddenly. Research news from those times to determine what might have caused this activity.
Check the company’s most recent annual reports (at least three years' worth) and review its financial statements. The company balance sheet shows you details about the firm’s assets, liabilities and stockholder equity during each period. The profit and loss statement shows you whether the company has consistently brought in a profit or has been dealing with increasing losses. The annual report also commonly includes a 10-year summary of the company's financial results.
Determine the stock’s P/E ratio, which is the current stock price divided by yearly net earnings per share. For instance, if the stock price is $45 per share and the net income per share outstanding is $15, the P/E ratio is 3. Generally, the stock is considered a better value when this ratio is low compared to other similar companies. However, this is not a hard and fast rule.
Check on the background of each principal employee of the company. That includes the Chief Executive Officer (CEO), Chief Operation Officer (COO), Chief Financial Officer (CFO), the vice presidents and the board of directors. These people are in charge of the company’s strategic plan and have a major effect on whether the firm and its stock does well in the future.
Read news articles concerning the company and its stock from respected pundits, investors and financial researchers who have intimate knowledge of the organization. Oftentimes, they can provide guidance and insight on upcoming changes to the company that might affect the stock price, like hiring trends and management changes.
Tips & Warnings
- Keep in mind that outside forces, like changes in government policies, might also affect a stock’s performance in the future.
- Consult with your financial adviser before choosing a stock.
- If you have a compatible smartphone look for stock applications that allow you to receive updates and news about your stock when you’re on the run.
- "The Wall Street Journal": Evaluating a Stock
- Dummies.com; Reading an Annual Report; Dr. Kathleen Allen, Ph.D
- Bnet; How Uncertainty About Government Policy Affects Stock Prices; Larry Swedroe; February 2011
About the Author
Jade Balle has been writing Web articles since 2004, covering everything from business promotion to topics on beauty. Her work can be found on various websites. She has a small-business background and experience as a layout and graphics designer for Web and book projects.