10 Factors to Consider When Selecting a Stock

#1. 52-Week Range

Typically a stock is considered a good value if it is trading near its 52-week low. However, make sure the
stock is on a rebound if it is near the low, because it could always drop farther and create a new low.
Dont get caught in the assumption that a stock cant possibly go any lower. A stock can always go in
either direction, no matter how much the price has fallen. On the other hand, if a stock is trading near
its 52-week high, it should probably be avoided because it will likely hit a resistance level and shoot
downward.
#2. Volume
Volume is the number of stocks bought and sold in a single day of trading. Make sure the average
volume of the stock is over 50,000 or so. If the volume is low, then liquidity is low. This means it is hard
to buy and sell because there arent many buyers and sellers and the stock moves in a very choppy
fashion. This creates a lot of unnecessary volatility, which most traders generally avoid. This is the
unfortunate scenario often involved with trading penny stocks.
#3. Price/Earnings Ratio (P/E)
The PE ratio is a critical number in evaluating stocks. The formula for finding the PE ratio is a simple
one: Price per share/Earnings per share. So if the price of the stock is $2 and the EPS is $1, then the PE
would be stated as 2.0x. It is unnecessary to remember this formula since the PE ratio is always listed
on the quote page of a stock. The reason for the formula was to show the relationship between the
numbers, and also give an idea of how to tell if a stock is over or undervalued. Think of undervalued as
underpriced and overvalued as overpriced. This means if the PE is very high, then the price per share of
the stock must be much more than its earnings per share, which means the stock is overvalued, or
overpriced. The opposite is true if the PE is low. So basically, it is beneficial to look for companies with
low PE ratios between the range of 1.0x and 10.0x. When the market is performing better, the
preferable range would be increased to around 10.0x and 20.0x. Also if the company has a negative
earnings per share, then the PE will not be listed.

The quotes page, sometimes called a "snapshot", shows the PE ratio, as well as the last trade price,
earnings per share, volume, 52-week range, dividend information,market cap and more.
#4. Earnings Per Share (EPS) and Cash Flow Per Share (CPS)
EPS is determined by the following formula: Net Income Dividends on Preferred Stock/Average
Number of Shares Outstanding. It breaks down the profit, or earnings of a company in terms of
individual shares. Investors should look for positive earnings as well as consecutive growth over each
quarter. If a company fails to meet the earnings expectations of analysts, it instantly decreases the stock
price when the actual earnings are announced. EPS has one fatal flaw. A companys accounting
department can easily manipulate it. However, it should still carry some weight in choosing a stock
nonetheless. A similar measure that has grown increasingly popular is cash flow per share or CPS.
Accounting may be able to hinder earnings to look more favorable, but cash is impossible to
manipulate. CPS gives a true account of how much cash a company really has on hand, and how
effective its operations are. This is a crucial statistic in itself to determine if there is enough cash to pay
off debt and engage in future endeavors that contribute to stock price increases. Look for a company
that has both positive EPS and CPS.

#5. Market Cap

Market cap is determined by the following formula: Number of Shares Outstanding x Price per share.
Remember that owning a stock is actually a partial ownership in the company. If someone were to buy
the entire company, they would have to buy all of the stock. The market cap could be thought of as the
overall price to buy out a company. The market cap is used to classify the size of the company into one
of the following categories: nano, micro, small, mid, large, and mega caps. The large and mega caps are
worth billions of dollars, while the micro and small caps my only be worth several million dollars.
Basically, the larger the company is, usually the more stable and safe it is. There are exceptions such as
GM and Enron, of course. Think of the sizes and the stability of stocks as trees. The nano cap could be
compared to a small maple tree that is violently blown around in storms (market crashes) and could be
easily uprooted (bankruptcy). The large caps are like mighty oaks that can withstand many violent
storms with little damage. However, the small maple tree can grow several feet over a few years, while
the large oak has matured and fosters little potential for extreme growth. Basically, when investing,
look at the market cap or size classification to find something that matches your risk tolerance. The
smaller the company the more potential growth, and the more possible risk. The opposite is true of
large companies.

#6. Beta (Volatility)

Beta is an indicator of a stocks standard deviation, or volatility. It is somewhat difficult to calculate, but
is provided on many websites. The calculation involves taking the standard deviations of the monthly
returns of the particular stock along with the S&P 500s monthly returns for five years within the same
time horizon and inserting the two standard deviations separately into an overall variance formula and
dividing by the population variance. Actually, using beta is much less complicated than its calculation. If
a stock has beta of 1.0 it moves in congruence with the market. This means if the S&P 500 goes up 1% in
a day, the stock should go up 1% in a day. The opposite is true if the market goes down. If the beta is
2.0, and the market increases by 3%, then typically the stock will go up 6%. Sounds great until the
market drops 3% and the stock falls 6%. If the beta is negative then it moves inversely, or opposite of
the market. Very few stocks have negative betas. Typically, large blue chip companies will have the
lowest betas. Microsoft is normally around a 0.9 or 1.0, moving with the market. Pfizer is usually a 0.8
beta; meaning if the market goes up 1% it will only increase 0.8%. Casinos usually have the highest
betas. The Las Vegas Sands is currently a 4.7. Beta is really a double-edged sword. Theoretically, an
investor could make the quickest, and most significant gains with a high beta stock, but could lose the
most as well if the market underperformed. If you like to watch your money move like crazy from day
to day, I would recommend a high beta. If you like to play it safe and preserve your money, I would
recommend searching for a low beta that has little volatility.

This is basic proof that higher beta stocks on average have higher returns than low beta stocks.
#7. Dividends
Dividends are cash paid per share by companies to reward their shareholders for holding their stock.
They are comparable to coupons on bonds, except they are not as much. When investing in a company,
check to see if they are currently paying a dividend. If a company has money to hand out, then they are
usually doing well. The companies that pay the highest dividends often have steady growth also.
#8. Open Interest in Option Chains
Many stocks offer options contracts for buying and selling in the future. An investor doesnt have to
understand options to take advantage of this following tip. When researching a stock on a financial
website, there is typically a link for options chains. These are simply the options available for the stock.
They are often listed in T shaped boxes with call options (the right to buy the stock) on the left and put
options (the right to sell the stock) on the right. The strike prices are listed down the center of the T.
These prices give a range in which the stock is expected to move. Both the call and put sides have open
interest columns; this is the key. The people in the open interest column on the left are bullish; they
think the stock price is going up. The people in the column on the right are bearish; they think the price
is going down. There is a different amount of open interest for each expected price. Basically, look for
stocks that have more open interest on the call side than the put side. This shows that more people
want to buy the stock in the future than sell it. It is worth getting a second opinion, or in this case,
thousands of opinions when purchasing a stock.

This shows us that the current price of INTC is $22.82 and there are 2918 people (Open Int.) that believe
it will reach $30 and only 770 who think it will not break $30. This gives us a nice idea of future price
expectations.
#9. Insider Activity
Take note of what is happening inside of the company itself. If the CEO just dumped 50,000 shares, it
may be time to get out. The insiders know the company better than any analyst. If the number of
shares bought by individuals inside the company has been increasing, it may be a good time to buy.

If your stock makes the front page of the Wall Street Journey, you're in for big gains or big trouble!
#10. News/Popularity
News affects the expectations and decisions of the investing public and expectations determine stock
prices. Popular glamour stocks such as Yahoo or Apple are always in the news, and the prices are
sometimes inflated by the hype of the press. Try to choose stocks that are not the victim of newspaper
publicity and television headlines, and therell be much smoother sailing.
Quick Checklist for Selecting a Stock
1. Make sure the stock is trading closer to the 52-week low than the high and also has upward
momentum.
2.

Average volume should be around 50,000.

3.

The PE ratio should be somewhere between 1.0x and 10.0x.

4.

Earnings and cash flow per share should both be positive with positive growth over each quarter.

5. There is no specific market cap to look for, just be aware of the risk/reward trade off of each size
and their stability as well. (Personally, all of my highest returns have come from mid caps.)
6. Beta is much like the market cap, in that there is no specific beta to look for. It just depends on risk
tolerance. However, if you have a longer time horizon to invest, I would recommend a higher beta and
vice versa.
7. Look for stocks that offer dividends. Dividends are usually, but not always, a sign of good financial
health.
8. Look at the open interest on options chains for a specific stock to see how many people are
planning on buying and selling and at what price. This basically serves as an opinion poll on the stocks
expected performance.
9. Always consider the amount of shares CEOs and other executives are buying and selling, to get an
accurate picture of what is happening on the inside.
10. It may be a good idea to avoid stocks that are constantly in the news. Stock prices will often reflect
the investors perception of the stock, which is usually not an accurate evaluation of the underlying
company. The dot com bubble in the 90s is a perfect example.