There is no perfect stock. I wish there were. That being said, a few basic concepts need to be suggested for picking a company you like, can live with, and will potentially make money for your future. I will get to picking mutual funds, but decided to go with stocks first.
Today we will look at a couple of ideas in particular, but there are many. So do not assume these are the only criteria on which to base your stock selections.
One aspect to look for right away is, does the company make money? It sounds pretty obvious, but some just don't. The long and the short of that is to find one that does.
The next thing to look at is Return on Equity (ROE). This looks at how efficient a company is at generating profits.
What is equity? Equity is the value of an asset (in this case, your shares of stock) after all its debts have been paid. This is the stock's net worth or book value.
Here's the scary math part (stay with me now!!):
ROE = net income - dividends/shareholder's equity
Everyone still with me?? The slash means divided by (I am not trying to be condescending, I just am trying to be clear). So ROE is what the company makes divided by the shareholders' investment. This indicates a corporation's profitability.
Are we all OK? Take a deep breath, and let's move on. No need to get fussed up over this. You want to look for stocks whose ROE has increased over time. (In general terms; a decreasing ROE may have other factors associated with it, but that's for another day.) That's it.
How do you do this? You look it up. You can go to Morningstar and find out all sorts of information. Go to www.morningstar.com/ and let's get started! So please log on!
After arriving on their welcome page, look for their logo in red at the top left. See the little box that says "quote" to the right of their welcome greeting? Type in AAPL. That's the ticker for Apple Inc, which we are going to take a closer look at as an example.
After you type in the ticker, click on the stock in the bluish gray drop down box, and let's check it out.
You should land right on the 'quote' page. This will show you the last price the stock sold for, its day range, and other useful information. Now scroll down the page to Key Stats. Second from the bottom is ROE-- that's return on equity! It will show Apple's ROE, plus the industry average (the industry in this case is Consumer Electronics; Apple's sector is Technology) . The 'relative to industry' is shown here.
Now you can either click the tiny word "more" in the Key Stats area, or you can go back up to "Key Ratios" in the gray bar. A new page will pop up. Scroll down util you see the heading 'Profitability.' In that listing you should see Return on Equity. It gives a list for the ratio over the past 10 years.
Apple, like anything else, has had its ups and downs. But overall the numbers have increased substantially over the past 10 years.
Play around with this site. On the main quote page, check out not just the overview, but the company profile and Apple's industry peers. Look at the dividends, the yield, the projected yield, Apple's grade in growth and profitability. If you go to 'Chart' in the gray bar, you can see Apple's price change over the past day, month, 3 months, year-to-date (ytd), year, and on up to 10 years.
Some features on the Morningstar site are free, like this one. Others will require you to upgrade to their premium analysis. My hope is to show you the tools that are free and can be of help to you.
So today, return on equity. Next time we'll look at other areas to consider when selecting a stock.
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I will eventually figure all this out. As always, I look forward to your questions and comments.