Nowadays it is very much clear to everybody that prices of stock for a short period of time plays a huge influence on the investor’s mind. Today in the market, there is lots of information available just to ensure a better chance of identifying the correct stock. Hence, understanding the importance of a stock and identifying the correct one makes the difference between the successes of an investor.
Basically, stock selection is the same as a team selection. An investor must select good stocks which will act like valuable and key players instead of select just one or two good stocks throughout the initial stock selection process.
Here are five factors which should be considered before selecting stocks from the market.
- Price-Earnings-Growth Ratio (PEG)
The first and foremost factor is the PEG or known as the price-earnings-growth ratio. If a company is rising very fast in the market, it doesn’t mean that investing money in it will be a wise decision. PEG plays a role here. PEG is determined by dividing the PE ratio with the growth of prospective rate. Any stock with a PEG in between 1.0-2.0 will be the ideal choice to invest money.
- Relative Strength Index
The price performance of a stock in comparison with the market value is known as the RSI. In a maximum number of cases, the index of a stock will remain in between 30-70 and the other will remain in between 40-60. It is necessary to check the RSI indicator before picking up a stock and if it is lower than 30, then the fundamental of that stock is flawed.
- Consistent Earnings Growth
To expand the value of a stock the most important thing is the consistency of earnings growth. If the growth remains steady without having any interruption in the market, then this particular stock is a good choice for the investors to get maximum profit. Still, always check the growth of the last three years before picking it up.
- Coefficient Variance
The coefficient of variance or CV is the measurement of consistency of the earnings estimate. The range of CV lies in between 0-15. If the CV of a stock is greater than 4, then it is obvious that the analysts have a great confidence in their estimation and hence the stock can be picked up for earning money purposes.
- Free Cash Flow
A free cash flow plays a big role for picking up a stock in a company. Cash flow of a company is the remaining capital after paying all taxes and duties, debt and other expenditures. So, if a company has a disrupted cash flow it means that the company has a great possibility to expand further. So buying stock of this company will be a good selection.