How Do I Decide If a Stock Is Worth Buying?

Knowledge takes the guesswork out of investing.

Knowledge takes the guesswork out of investing.

Buying stock isn't like buying a new TV, where once you get it home, if you decide you don't like it you can always take it back. When you buy stocks, you want to be sure they will not only hold their value but will hopefully increase in value, giving you the opportunity to make a profit when you sell. The key is knowing when a stock is worth buying. Understanding several important aspects of choosing a stock can help you choose what to add to your portfolio.

Step 1

Study the company. Before purchasing stock from any company, you should do at least a cursory check of the company's current holdings, future projections and seeming stability. If a company is rumored all over town to be going under, you need to step back and investigate before sinking funds into their stocks. Most companies have websites you can visit to view their posted revenue and loss information for the past few years.

Step 2

Compare historical data. Even if a company is temporarily stressed, studying the company's history, evaluating the viability of its products and analyzing the future of those products can help you determine if its stock is worth buying. In a tough economy some stocks will temporarily dip and you can pick up some good deals. It is important to study historical data of the company to get a feel for whether or not you can buy low today and count on it to rebound later.

Step 3

Perform a technical analysis on its prices. Checking the prices for the past 200 days can give you an idea about the trends for that particular stock. Trends tend to repeat themselves, according to Narrow Bridge's website. Many analysts believe that by watching the movement over a fixed time period, you can determine the baseline, from which the stock should theoretically always recover. When it hits the baseline or is close to it you might decide it is worth buying. Conversely, if the stock is at the top of the range for the targeted time frame, some analysts believe it can only go down and it is not a good time to buy.

Step 4

Complete a fundamental analysis. A fundamental analysis views the current and projected financial landscape and uses that information to determine today's value. You can use the company's income statement and balance sheet to discover the company's financial health. Though it is not set in stone, it generally is a good indicator of what you can expect from the company at least for the foreseeable future.

Step 5

Discuss it with a professional. Even if you plan to manage your investment portfolio yourself, you can still sit down with a professional analyst and ask questions. Examining stocks from a professional viewpoint can alert you to things to watch for and things to embrace. You may decide to retain his services after meeting with him, but if not you will come away from the meeting more educated than when you went in.

About the Author

Candace Webb has been writing professionally since 1989. She has worked as a full-time journalist as well as contributed to metropolitan newspapers including the "Tennessean." She has also worked on staff as an associate editor at the "Nashville Parent" magazine. Webb holds a Bachelor of Arts in journalism with a minor in business from San Jose State University.

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