How to Evaluate a Stock before you Buy

With so many stocks available for you to choose from, how do you determine the one that is right for you? After all, if you pick incorrectly, you could lose all of your hard-earned money. But if you can learn about the eight terms listed below then the likelihood of you losing your money will diminish greatly.

P/E –

P/E stands for price earnings ratio. This basically tells you what people expect from this stock. If the P/E ratio is between ten and thirty then it’s considered a fairly stable stock.

However, if it’s really high then that means people have high expectations for this stock. And if those high expectations are not met then the stock is much more likely to lose investors, which will cause the stock to lose money.

This is something that you don’t want to happen. So if the stock has a high P/E ratio just be aware of the possible outcomes. An example of a high P/E ratio stock would be iRobot Corp, and their P/E ratio is currently hovering between ninety six and ninety seven. So if the stock is above twenty five then it’s usually considered high.

Cash Flow –

Cash flow is basically how much profit the company makes per year. Obviously, if the company has a good cash flow then they’re more likely to avoid bankruptcy. And that’s great news for you. However, for some stocks it’s perfectly normal to have a negative cash flow.

An example of this would be banks or other similar financial institutions. This is mostly due to these companies offering loans to people. But financial institutions can be great stocks, so don’t always be scared away by a negative cash flow.


ROA stands for return on assets,and ROE stands for return on equity. Basically, you want to see both of these figures going up or staying stable over a period of years. If the ROA or ROE is negative or falling, you may want to think twice about purchasing that stock.

Financial Leverage –

Financial leverage basically shows how much the company has acquired in debt. You may want to avoid investing in companies that have a financial leverage higher than five. But again, like cash flow, it’s normal for banks and other financial institutions to have a higher than normal financial leverage ratio.

Company History –

Warren Buffet is considered to be a genius when it comes to stocks. One of the things that he recommends is that the stock you are thinking about acquiring should have been around for at least ten years.

Over the course of a decade, many things can happen to a company. There will be good times and bad times. If a company can survive the bad times for at least ten years then they’re more likely to handle future bad times with equal skill. So if a company has been around for at least ten years then there’s a good chance that they’ll be around for a lot longer.

Moat –

A moat is an economic advantage that a company has over rival companies. For example, Walmart’s moat is mostly thanks to its huge size and cheap goods. Starbucks is another example of a company with an economic moat. However, the Starbucks moat is not nearly as good as Walmart’s moat. It’s just coffee after all. But the Starbucks brand name still gives them an economic edge over their rivals.

Dividend –

A dividend is a small payout to you from your stock company. Dividends can be paid out at various times of the year, but most seem to be given out on a quarterly basis. These dividends are especially useful for long term strategists because your dividends will compound over time.

So your first dividend may be ten dollars, and then your next dividend will again be ten dollars. However, that ten dollars will be added up in addition to the previous ten dollars. Thus, your money will compound each time the dividend is payed out. As long as you don’t touch the money, it will continually increase.

Market Cap –

A market cap is basically how many sales a company will generate in a given year. Try and only purchase companies with a market cap of a hundred million or more. Anything less than this and the company might go bankrupt if their sales don’t pick up.

Picking stocks is a lot of work. It takes time and patience to learn all of the jargon and other tricks of the trade. But when the day is done, you’ll be glad to see that your hard work is paying off.