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How do I Choose the Best Stock Investment?

Article Details
  • Written By: Adam Hill
  • Edited By: Bronwyn Harris
  • Last Modified Date: 25 March 2018
  • Copyright Protected:
    2003-2018
    Conjecture Corporation
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In the world of finance and stocks, there is something for literally everyone. No matter what a person’s risk tolerance, interests, or how much time he may have available to manage investments, there is likely something that will fit. Choosing the best stock investment will require an investor to take into account his personal circumstances and goals when it comes to investing.

It may be that a person is risk-averse and seeks security rather than the potential of large gains which can come with the risk for big losses as well. In this case, the stock of a company with a strong brand or a proven track record with good value may be the best choice. Another person may be interested in investing in alternative energy, for instance, whether because of personal interests or because of the potential for growth and gains in the value of the stock. He will likely look at alternative or “green” energy companies to choose an investment, always taking into consideration that every stock investment has a potential for loss of value.

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Once an investor has determined his goals and the extent of risk that he is able and willing to accept in a stock investment, there are a few parameters that will help him determine what stock is right for him. One of the easiest and most important ways to make this determination is by calculating or looking up a stock’s price-to-earnings (P/E) ratio. “Price” refers to the price of a share of company stock, and “earnings” mean the total earnings of the company, divided by the number of shares of company stock that are in existence.

A low P/E ratio, one lower than five, for example, may indicate that a particular stock investment is undervalued, especially if its fundamentals are strong. If a company has little debt compared to equity, if its earnings are consistent, and the management is scrupulous and competent, then it can be said to exhibit strong fundamentals. A low P/E ratio in this case may mean a time to buy, especially if the investor’s goal is to buy the stock and hold it for a long period of time.

A very high P/E ratio, such as one higher than 20, may indicate a number of things, including that the stock is overvalued, or that stocks in general are overvalued, for instance. Stocks with high P/E ratios sometimes get that way because of speculative buying, meaning that there could be a good chance that the stock’s value will increase further. These types of conditions may be attractive to a trader who is looking to capitalize on short-term market trends.

Of course, individual stocks are not the only type of stock investment. Numerous mutual funds exist which are collections of stocks from various companies which may have certain characteristics in common, or they may be a diversified mix of stocks with different attributes. A financial advisor can help you determine your risk tolerance and decide which mutual fund or stock investment is best suited to you personally. This can be especially helpful for someone without a natural affinity for finance, but who wishes to invest in stocks for the potential gains available.

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