If you're dead set on stocks:
1. Does the company either (a) do something that nobody else does, or (b) do it so much better than everyone else that they're the clear leader? So you're talking technology that is proprietary (iPod for Apple, or Google, or some shit like that), or category killer (WalMart, Coke, Pepsi, Home Depot, et al)
2. Are they priced fairly? In the long run it's all about capital appreciation, through equity or dividends, so your question is "if I get a dividend what will my total take be, principal and interest, after X years, and if I buy a stock that pays no dividend and they reinvest their profits what will the total value of my principal be by then?" (edit for spelling because I wasn't paying attention)
Better explanation of that deal:
You buy OldCo at 100/share and they pay a $5 a year dividend. At the end of the year you have $100 in stock and $5 in cash. That's $105 total. Google is paying no dividend so you're banking that they reinvest whatever profits they get and when it's all said and done the shares (which you bought at 100 for the sake of comparison) are worth the initial investment plus the increased value because they've plowed their earnings back into the company, and/or increased revenue or whatever. Hopefully more than $105 a share.
That's where we get to something called a P/E ratio. Price to Earnings ratio. If it's very high, that means that the stock is "expensive" and you're going to have to get one hell of an increase in revenue to earn back the premium you're paying.
3. Is there a reasonable expectation that new businesses won't adversely affect your company? If you own a drug company stock that makes a cure for the symptoms of some disease, and there are 10 companies that have a drug at FDA approval level for a cure, stay away. Do you want to buy a company that relies on one thing, say some microchip expansion, when it's possible that in the next 2 years the whole thing may go in the shitter because the new chips don't need the expansion?
4. Is there room to grow? If you buy WalMart today, how much can WalMart grow? A lot? Maybe, depends on whether or not you think there will be WalMarts all over Europe and Asia one day. You DON'T want to buy a company that has hit the end of its growth.
5. Make sure it's an industry and a company YOU KNOW. Say you play online games all the f-ing time, and that's what you know. If you see a company that has a cool game coming out, and you know that they are rumored to have 10 more cool ones coming, that's something you know. After vetting companies based on what you know, then go to the financials, then look at the P/E, etc., and narrow from there. Maybe you're a skateboarder and you know that Skatemagic has the hottest new trucks and a new way to make boards. Start there, do your homework on the money side of things and the price, and see what comes of it. Don't just pick a stock based on wow factor or anything else if you don't know the industry cold and the company and who runs it.
The truth is there are a million things to consider and a million wrong answers. I was a stockbroker for 8 years and you learn new shit every day, even after that long. The only way to go is to buy a company you believe in, in an industry you believe in, at what is a reasonable price, and pay attention to changes in the company and the industry.
Remember, stocks are just paper representations of the company. If it's a good company, doing good things and earning a good profit in a stable industry, then the stock will eventually be a winner.
Last edited by Dersmikner (2008-01-14 14:26:30)