Money & Career

4 secrets to picking stocks

Author: Canadian Living

Money & Career

4 secrets to picking stocks

As online brokerages become easier and cheaper to use, more and more people are choosing to pick and buy their own stocks.

But picking stocks is a complicated job. A lot of people pick stocks because they read about the company in the news that day. Or a friend told them that they must buy a little Alberta mining company. Or they just want to tell their friends they own a part of Apple. These are not good reasons to pick a stock.

If you don't do your research, there's a good chance your hot stock will end up being a dud. Even if you do spend days reading a company's annual report, there's no guarantee you'll make any money. (Just ask all the professional money managers who loaded up on Research in Motion after it fell from $148 to $60 -- then watched it plunge even lower.)

However, do at least some due diligence and you have a better chance of seeing positive returns than if you just throw a dart at the TSX. Here are a few stock-picking secrets you should keep in your back pocket when considering a company.

Stock-picking secret #1: Regular dividend increases
If you want to buy a company that pays a dividend, don't just buy the highest-yielding business. Professional stock pickers like to buy companies that increase dividends every quarter, or at least once a year. It doesn't have to be by much, but consistent raises are a sign of company strength and confidence. If the company suddenly stops increasing its yield then there could be something wrong.

Stock-picking secret #2: Low price-to-earnings
Many portfolio managers look closely at a company's price-to-earnings ratio, known as P/E. The P/E, which is calculated by taking the share price and dividing it by the company's earnings per share, shows how much investors will pay per dollar of earnings.

A company that has a P/E of 20, for instance, is more expensive than a company with a P/E of 10. If you want to "buy low, sell high" -- and you should want to do that -- you should look for companies with low P/Es. What's low? Compare the ratio to other companies in the industry. If the P/E is lower than a competitor, then it might be a good buy.

P/E is just one metric though. Don't buy a company just because it has a low P/E. Find out why it's low and if it has the potential to increase its P/E.

Stock-picking secret #3: What the executives own
Many professional managers look to see if company executives own their business's stock. The more stock they own, the better. It's a good sign when the CEO is putting her own net worth at risk. It means the person has confidence in the business. If executives start to sell, then you should consider unloading the company, too.

Stock-picking secret #4: You like their products
If you think a company's new take on sliced bread will revolutionize the bread industry, and you use their new bread-slicing machine every single day, then maybe you should buy a few shares. Many fund managers bought Apple a decade ago because their teenage kids couldn't stop talking about the iPod. Now they're rich.

There are plenty of other stock-picking tips, but these will get you going. Of course, don't buy a company just because you love its widgets, or because it has a low price-to-earnings ratio. When you find a company that fits into what we've talked about, do more research. Read analyst reports, talk to professionals and pay attention to annual filings. But, now, at least, you have a place to start.

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4 secrets to picking stocks

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