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Best Stocks to Invest In

Stockhouse Editorial
0 Comments|June 4, 2019

Stock investing can be exciting, but it shouldn’t be a rollercoaster ride for investors. If you know how to read company reports, basis spreadsheets, and what financial measures to review, you’re more likely to pick a winning stock. Staying up-to-date on market conditions ensures that you’ll know when it’s best to buy or sell.

Market volatility is a constant challenge for investors. But where there is upheaval there is also opportunity, and the drop in valuations means there are potential bargains to be had in Canadian stocks.

The best stocks to buy today depends so much on your individual financial situation.

Stock investing is a great way for Canadians to build wealth, but it can have its pitfalls. This list spells out the essentials every stock investor should remember:

You’re not buying a stock; you’re buying a company.

  • The primary reason you invest in a stock is because the company is earning profits.

  • If you buy a stock when the company isn’t making a profit, you’re not investing — you’re speculating.

  • A stock, or stocks in general, should never represent 100 percent of your assets.

  • In some cases, such as a severe bear market, stocks aren’t a good investment at all.

  • A stock’s price is dependent on the quality of the company which in turn is dependent on its environment. This includes its customer base, the industry it competes in, the general economy, and political climate.

  • Your common sense and logic can be just as important in choosing a good stock as the advice of any investment expert.

  • Always have well-reasoned answers to questions such as “Why are you investing in stocks?” and “Why are you investing in a specific stock?”

  • If you have no idea about the prospects of a company (and sometimes even if you think you do), always use stop-loss orders.

The Best Financial Metrics for Stock Investing

Financial ratios help investors find stocks that offer good value by giving numbers meaning and putting them into perspective. If you’re considering investing in a company’s stock, ensure that the company passes these ratio tests.

  • Price-to-earnings (P/E) ratio: For large-cap stocks, the ratio should be under 20. For all stocks – including growth, small-cap, and speculative issues – it shouldn’t exceed 40.

  • Price-to-sales (P/S) ratio: This ratio should be as close to 1 as possible (or below 1).

  • Return on equity (ROE): The ROE should be going up by at least 10 percent.

  • Earnings growth: Earnings should be at least 10 percent higher than in the year before. This rate should be maintained over several years.

  • Debt-to-asset ratio: Debt should be 30 percent or less compared to assets.

For novice investors, short-term trading comes down almost entirely to luck, and you can easily lose as much or more than you profit. Rather than thinking about investing as a way to earn short-term gains, it’s better to think of investing as a way of earning long-term profits.

Keep in mind that you’re still making money either way.

However with long-term investing, investors are able to minimize risk and negate the occasional crushing effects of short-term volatility and price-drops.

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