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How to choose a stock to buy?

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So you have set aside at least 3 months worth of your salary as savings for use in emergencies. With the remaining sum of money, you want to use it for investment. What are the things to take note of when buying a stock?

Buying a stock is like buying everything else. If it sells for a very low price, there is unlikely to be a long consideration or a long look at other alternatives before buying the stock. When the prices of the item is high, people will naturally want to consider other alternatives and see if there are cheaper items to be had for the same or roughly the same items. So when you buy a stock, do you look at alternatives and consider them first before plunging in to buy it?

Do your homework. When you are going to spend more than $1000 buying a stock, you need to seriously do some research and read up on the company before you invest. So what do you look at? The simple way to do so is to look at ratios of the company that gives you a picture of how the company is doing and what it finances are like. Is it on the way to bankruptcy? Have they been buying up a lot of assets like machinery in preparation for a large bulk order? So it will be reflected in the financial ratios of the company. The screenshot is from a online securities website where you can do basic research and define the ratios of the companies that you are looking for. So it is up to you if you want to set a high P/E ratio or a low one. In future, I will go through some of the ratios and explain the rationale behind them, but this is only a brief overview of what a novice investor can do to make sure that they don't just blindly invest based on stockbrokers' or analysts' recommendations.

Look at the big picture. Warren Buffet does not look at the macroeconomic indicators as he feels that it is hard to predict and understand. So this is contrary to what the legendary investor recommends. I think it is important to take a look and see where the interest rates of the countries you are investing are like, also to look at commodities and oil prices as they indicate to you whether the companies are stocking up raw materials to produce more goods and services and how the markets trends are likely to go. The sub-prime market is a good lesson, if you have been looking and been amongst the first to realise what the rising number of defaults in the sub-prime loans indicates, you could have benefited from selling off your stock holdings earlier. Inflation figures, consumption index and unemployment figures are also useful indicators to look at to get a feel of how the markets may be moving.

Using a dummy portfolio. For first time investor, it could be good to write down what you would have bought after doing the homework on the company that you are interested in investing and understanding the environment in which you are making this investment. Track your make believe portfolio to see if you had made money on your investments for a relatively short period of say 3 months to 6 months. You can try to do a few portfolio, holding different types of stocks and holding for different periods of time, some for the whole 6 months and some you 'trade' more often. In the end of this exercise, you will be able to crystalize your thoughts about what sort of investment strategies are best suited for you and at the same time minimise any mistakes that you could have made by investing straight away without any outside help. After this little exercise, you should have some useful ideas what basket of stocks to buy. And it will be the time to plunge in.

For me, my dad has invested for many years and I started work in a sercurities company so I had a little more exposure to how stocks and shares work so my learning curve started from that time. The first stock I bought was during an IPO (Initial Public Offering) when I didn't know what was a 'stag' and got a scolding from an old investor who asked me what I was doing there then.

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The information contained in this blog is prepared from data believed to be correct and reliable at the time of publication of this report. The authors do not make any guarantee or representation as to the adequacy, accuracy, completeness, reliability of the information contained herein. Neither the authors or any affiliates or related persons shall be liable for any consequences (direct or indirect losses, loss of profits and damages) of any
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