Thousands of stocks can be bought on the stock market. So how exactly do you find the least risky ones to purchase? In most cases it is best to perform a complete stock screen by using a set of criteria that allows you to look at different stocks and compare to see if they meet your requirements. Below are ten tips to help you determine which stocks are the least riskiest to buy through research and analysis.
1. Create Your Investment Objectives
Before you do anything else, you need first to sit down and establish a list of investment objectives. Once this list has been created, you should be able to create a suitable investment screen. The criteria you create to come up with your first screening should be made up of several quantifiable measures that you believe are essential to your investing strategy. For example, a few criteria that should be included are recent earnings surprises, dividends, market cap and size, and price ratio. All of these can help you determine the risk factor of the stocks you are considering.
2. Do Your Research
Once you’ve created a list of potential stocks that interest you, the next step is to perform extensive research to find the ones that are the least risky. There are plenty of excellent resources that are available online for researching stocks, and most of them are entirely free. Check out JB Oxford Stock Screener for an outstanding way to rank stocks based on certain criteria, including from least to most risky.
3. Look at the Company’s Income Statement
To determine how risky a stock is, it is a good idea to look at the company’s earnings growth, and, if possible, their earnings acceleration. Does the stock’s company exceed analyst’s expectations in previous years? The majority of investors consider company earnings to be the most important number when considering whether or not to invest in a stock. The assumption is that past earnings pave the way for dividends in the future.
4. Look Out For Tax Abnormalities
Any sign of tax abnormalities in a company is a bad sign that signifies that the company’s stocks could be riskier than what you’d initially think. For instance, if a company’s taxes are lower than 25 percent this typically indicates that the company is utilizing the carry-forwards of their tax loss against their income. This is a bad sign as it means that the company is using their taxes as an earnings booster, which is only temporarily improving their numbers.
5. How Many Common Shares Are Outstanding?
It is also important to look at the amount of common shares outstanding. If a company increases their number of shares, it can negatively impact their earnings per share. However, if a corporation has recently issued a new round of shares, it does not necessarily mean it is a bad thing, what’s most important to consider is why they are doing it.
6. Analyze the Company’s Balance Sheet
The most critical thing to look out for on a balance sheet is a company’s debt to equity ratio. This is the company’s long-term debt divided by the stockholder’s equity. The lower this number is, the less risky their stocks will be. In fact, ideally the company’s debt to equity ratio will be at zero. You should also look at how much cash the company has on hand compared to their annual sales.
7. Think About Services and Products
You need to take into consideration what it is the company is selling. Can you foresee there being a continual need and market for the product or service? The safest stocks to purchase are those from firms that sell necessities that people will always have a need for. Additionally, you should consider whether the company sells products and/or services that people buy repeatedly or just once. Lastly, take a look at the company’s competition to see if their offerings are as good as the company you are considering buying stocks from if not better.
8. How Stable is the Company’s Position?
Is the company able to protect their position? If they are not able to, then their large margins can swiftly become small ones, which will spell disaster for their stock. Look at whether or not there are any close substitutes for the service or product that the company is offering. In other words, can they easily be overtaken by their competition? The safest stocks are from those companies who have a unique product that cannot be quickly replaced by another company’s. You should also consider the barriers to entry in the particular industry of the company, as well as if the company’s products are patented or copyrighted.
9. What Does the Company’s Future Look Like?
Do research on the company’s future outlook, as well as the industry outlook that they are in. Are their long-term prospects favorable? Do research into figuring out where they will be in the next ten years. What do analysts say about their future? However, make sure not only to listen to what the analysts say but also make your own determination. If you can, try making your own projections on the future earnings and revenue of the company.
10. How Expensive is the Stock?
The cheaper the stock, the less risk you are taking by investing in it. Look at the P/E ratio, price to sales, book value, and price to earnings growth to determine just how cheap the stock is relative to the company’s average, as well as the industry average. On top of this, if you find any discrepancies in your research on prices, ensure that they are justified.