By Hank Coleman
Posted in Savings Account
While many financial planners recommend that mutual funds, index funds, bonds, Roth IRAs, and the federal Thrift Savings Plan comprise a majority of a member of the military’s investment portfolio, many people cannot resist the siren song of picking stock to invest in.
While stock investing should not make up a majority of your portfolio, it is okay to dabble in a hot stock tip or two in a separate account away from your retirement funds and after you have maximized your retirement accounts.
But for new investors or young soldiers, it can be daunting to find a great stock to invest in. There are literally thousands of individual companies that offer shares to purchase. So, how do you separate the diamonds from the rough? Below are five characteristics that you should look for in a good stock to buy.
You can use a company’s Price to Earnings Ratio (P/E Ratio) to get a quick feeling as to its value when compared to the overall market or its specific industry. A lower P/E Ratio of a company has the implication that it is more of a bargain when compared to other stocks similar to that specific company.
Good dividend growth consistently over time can be a good indicator that the company’s stock may rise at a pace that is similar to that dividend. If a company’s dividend was growing at 3 percent per year, for example, it would not be unfair of an investor to expect a company’s share price to increase by that much as well. But, if a company’s share price is languishing, investors will receive the dividend and essentially be paid to wait for the stock’s share price to catch up to the dividend growth.
There is a legal way to conduct insider trading when stock investing. When a member of the board of directors of a company or an officer in the company like its CEO buys or sells large blocks of shares of the company’s stock, they have to file a form with the Security and Exchange Commission (SEC). Searching through the “Form 4” filed with the SEC is a great clue as to how the management of a company views that company’s future prospects.
When you are considering a stock to invest in, you should know everything that you possibly can about that company. You should get more in-depth than just reading news articles and listening to the talking heads on CNBC. You should read the company’s Annual Report and quarterly statements, called 10-K and 10-Q, respectively. These forms are public information and can be searched through the Edgar Database at SEC.gov.
There are two schools of thought to stock market investment analysis: Fundamental analysis such as looking at the P/E Ratio and other ratio and technical analysis, which uses graphs to try and predict future stock price movements. Moving averages are one of the favorite technical metrics of picking stock. There are insights to be learned from comparing the short term 50-day moving average of a stock’s share price to its long term 200-day moving average.
These resources are a good place to start your search for stock. Remember that most of your investing for retirement should be done through good growth stock mutual funds in retirement accounts such as a Roth IRA or TSP.
Experts recommend investing in individual stocks with a small amount of money after retirement investing has been maximized. Finding a good company stock to invest in can be a daunting task, but you can find great stocks with a little hard work and research.
Hank Coleman is a Captain in the U.S. Army, freelance writer, and the founder of personal finance sites such as Military Money Might and Money Q&A. His writing has been featured on The Motley Fool, Military.com, and many others. You can follow him on Twitter at @HankColeman.