Choosing a stock to buy involves more than making a guess or picking a share based on its price. You want to choose a stock that will likely increase in value over time. Fundamental analysis is the process used by many to pick the best stocks to buy. It considers the company's profits, revenues and potential. When you perform fundamental analysis, you also look at the company's debts and consider its ability to repay them.
Find the income statements for the companies whose stock you are considering. The statements are usually available on the companies' websites under "Investor Relations."
Look for the company's revenue and profit on the statement. A company whose stock you buy should have revenue that increases each year or quarter. Additionally, the profit of the company, the difference between the revenue and expenses, should be growing.
Examine the ratios. Every company has a price-to-earnings ratio, or P/E. The ratio shows the difference between the cost of a share and how much it earns. Typically, the lower the ratio, the better the value of the stock. Another factor to examine is the debt-to-earnings ratio. Determine the ratio by dividing the company's liabilities by its assets. The higher this number, the riskier the investment, as it means the company has a lot of debt.
Find the company's return on equity (ROE). This will tell you how much money you are likely to make as a shareholder in the company. The higher the ROE, the more money you earn. An ROE may also suggest the potential of the company to perform in the future.
Items you will need
- Income statements for companies