How to evaluate stock before buying it?

There is lot of money that can be made in stocks but unfortunately very few people know the tricks of making money in stock. The majority loses money. This article will help you to evaluate a stock before buying it.

MAKE MONEY IN STOCKS BY FOLLOWING MUTUAL FUND COMPANIES PATTERN.

I personally believe that the intelligence applied by the mutual fund companies is far better than ours. So by following the buying and selling pattern of these mutual fund companies, we can judge whether we can safely buy or sell particular stock in that price range.

CHECK NUMBER OF SHARES IN OFFER AND BID ON IT

This first step is to see how many shares are available to be sold, and what is the no. of bids that is made to buy this share. If the ratio of bid to no of share available to be sold is near to 1 or above, then people are more interested in buying that share.

Formula

Ratio = (No. of people interested in buying this share) / (No of shares available)
If Ratio > 1 Shows more people are interested in buying this share.
If Ratio < 1 Shows more people are selling this share.

KEEP TRACK ON PAST HISTORY OF PRICE

Get the information in how the price has behaved over a last 3 years. If the price has increased which shows the company is in growth. But it is also necessary to check that share price has not crossed over priced limit. This information can be obtained by finding the book value of the share. Say book value of the share is Rs.500 and market price is 250, then the share has not crossed the over price limit.

TRACK THE PRICE EARNING RATIO

By comparing the price earnings ratio (P/E Ratio) with the Market P/E ratio one can judge whether a particular share is overpriced or not. Always prefer stock whose P/E ratio around 10 or below.

BUY STOCK WHICH ARE GIVING NOMINAL DIVIDENDS

You can buy a share that gives nominal dividend around 2-3% to its investors; this can be treated as excellent.


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