As a new investor in the stock market, the most important question that one asks is ?how to pick up good stocks?? The answer to this question is very critical to be a winner and a consistent profit maker in the stock market. Although there is no full proof formula that may teach one to be a good investor, there are several methodologies and studies that one may apply to pick up good stocks.



The first and foremost question is whether one wants to be a ?growth investor? or a ?value investor.? These two groups have different strategies for choosing and investing in stocks. However, both must do a thorough study of the companies they choose to target. These companies must show healthy signs of growth and not go bankrupt to prevent the investor from losing all.

Some of the signs of a good stock are as follows:

The account records of the company must show a good flow of cash. Even after paying the shareholders, it must have enough cash for other activities, such as mergers and acquisitions.

The company should have a good history of consistent dividend payment; this dividend however should not be too high. If this is the case, the company has a greater chance of going bankrupt.

The company history should also suggest that the stakeholders have raised this dividend consistently and not at one go.

Now coming to growth investors; these investors look for stocks that are considered ?hot? in the market. Thus, they target smaller and growing companies that have good potential for growth quickly. Determining this potential is the toughest job for a growth investor. He/she may however evaluate various criteria to reach a logical decision.

The company should have a track record of good revenue generation, say over a 10-year period. This requires a thorough study of the company track record.

It should also have a projected growth rate of 10-12% Analyst reports are very useful to make these projections.

The company should have a low pre-tax profit margin. If the company surpasses its previous 5-year average of pre-tax profit margins it should be a good stock to invest in.

The return on equity (ROE) of the company should be high and should average well over the previous 5-year period.

All these and more can help a growth investor gauge the real potential of the stock to invest in.

Value investors however follow a strategy which is different from a growth investor. Though, some of the criteria they look for investing in a stock may be overlapping, the fundamental strategy remains discrete. They look for companies to invest in, which can show good potential for growth in the long run, though they may not show a high stock valuation at present. They too look at various criteria:

The stock should have a low value of 25% below its 5-year average and its profitability level should also be low.

However, these stocks must belong to a big company. Big names provide a good reassurance of recovery suggesting a history of such fluctuations.

The company management study is also very important as people make a company. Thus knowing facts such as the educational background of the top managers and their management strategy, can give a good idea of how strongly the company will recover and grow in the long run.

Moreover, a long-term profitable stock will show a history of consistent ROE. This is also a big factor while making a decision.

Low-debt stocks are also more favorable as they have a good potential to recover.

However, in spite of all the tips, it takes experience for an investor to become an expert.