Stock Market Basics – Three Effective Steps on How to Pick the Right Stocks Like Warren Buffet

Many amateur investors have taken advantage of Warren Buffet’s method on stock picking in order to increase their earnings from stock investment. There are also books that attribute the success of many investors in increasing their profit as a long term investment. His personal views of investment has inspired many analysts to determine the values of a stock – whether it can perform its best within a long period of time. In other words, it is all about value investment in which value investors look for securities with prices that are unjustifiably low based on their intrinsic worth.

When it comes to company investment, he is more focus on how well that a company can make money as a business. This shows that he really understands the company’s nature of business and how does the company gain profit from the business.

Bear in mind that there are several steps that have taken into account in choosing the right stocks such as:

Step 1: The performance of a company

Sometimes return on equity (ROE) is referred to as the “stockholder’s return on investment”. It shows the rate at which shareholders are earning income on their shares. He always focuses at ROE to identify whether or not a company has constantly performed well as compared to other companies in the same field of business.

Step 2: Determining the debt/equity ratio

This particular ratio shows the proportion of equity and debt that the company is using to finance its assets, and the higher the ratio, thus the more debt is financing the company. An excessive debt-level compared to equity can cause volatile earnings and large interest operating cost. He prefers to see a small amount of debt so that earnings growth is being generated from shareholders’ equity as opposed to borrowed money.

Analyze the trends of the profit margins

As a matter a fact, a consistent increase of profit margin of a company improves the profitability of a company. In order to get good indication of historical profit margins, investors should look back at least five years. If the profit margin keeps increasing within a certain period of time, it means the company management has been tremendously efficient at controlling expenses.

Source by J.J. Yong

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