How do you choose which company to invest in?

Question

Hey,

I can't figure out how exactly i'm meant to choose a company which I want to buy shares in. How do you actually choose which companies you want to invest in?

I know about the research part afterwards and during the process of choosing but I just cant decide which ones are best.

I looked at the EPS (Net profits/Average shares outstanding) but what exactly does it represent and a bigger EPS is better right?

What is the P/E and what does that represent?

Finally looking at the EPS and doing research only works for long term investments right? When people do day trading, with the exempt of breaking news, what do they do to choose where to invest?

Thanks for reading, Im looking forward to your answers.

Answer 1

Wow, tough questions.  There isn't one right way to pick companies to invest in.  There are many different theories and strategies and all of them have different successes.  Some strategies are more difficult to follow than others and some may also be customized or personalized to your own personal investing goals and risk tolerance.

I would suggest that you first determine your investing goals and risk tolerance.  High risk companies can deliver the highest returns, but you have to be able to divserify to reduce your risk and you have to have a tough stomach to handle all of the severe ups and downs.  

The PE ratio that you mention is just one of many fundamental indicators that people look at and it is one of the most common.  But, you can't ever look at that alone.  Also, this indicator needs to be judged in relation to other companies in the same industry or business sector.

One helpful sight that provides some very good guidance and is an easy tool for evaluating stocks is Quicken.com.  You don't have to have Quicken to use it, but it is helpful and easier if you do have it.  Quicken.com has a Stock Evaluator that has a Summary tab that provides an analysis and comparison all of the important indicators to other companies in it's industry.  You can quickly tell if a company is leading in all financial indicators in it's industry.  This is a long subject, but go to Quicken.com and then look for the stock evaluator.  The website is http://www.quicken.com/investments/secev...

Day traders looks at technical indicators and charts.  They trade on momentum to capture the ups and downs of the day.  They track a limited number of companies and learn how the prices fluctuate during the day.  They look for patterns and trade the patterns acording to the charts.

There are many books written to answer your questions.  This is just a drop in the bucket.  Hope it helps a little.

Good luck.