Research.
As a novice the temptation, to listen to tips from experienced investors or brokers and then buy those stocks, is huge. Nothing wrong in listening to the tips.
However its important to do your own research.
Some of the criteria to consider while researching are as follows
- Results posted by the company. Look at quarterly as well as yearly. Look for consistent growth. A simple number to look at here would be EPS (Earnings per share). A continued increase in this number generally indicates that the company is in good health.
- Graph of the stock price over a long period of time ( About 6 months to a year is decent ). The trend in the stock price should typically be consistent with market conditions and the earnings growth. Any significant deviation would be indicative of some news around the company or its industry sector.
- Check price to earnings ratio (P/E) of the stock. This ratio generally indicates how costly or cheap the stock is. If its very low but greater than 0 then there is a good chance that the price of the stock may have been hit due to certain factors. However for companies with strong potential its generally a good time to buy.
A corollary to above rule is that a high P/E is generally a good time to sell.
- Check news. Although the 3 parameters mentioned above can help one in making judgement about any stock, news is what really causes stocks to move in a big way and in a relatively short time frame. Its usually difficult for a novice to make good judgements about stock movements based on news. This is however something that only can come through experience. Therefore it is worth keeping abreast news and its impact on the market.
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