For investors, finding a stock to buy can be some of the most fun and rewarding activities. It can also be quite lucrative, provided he or she ends up buying a stock that increases in price. Below are five tips to help you identify stocks that have a good chance at making you money.

SEE: Tips For When To Buy, Sell Or Hold

When a Stock Goes on Sale
When it comes to shopping, consumers are always on the lookout for a deal. The popularity of Black Friday and the Christmas season are prime examples of low prices spurring voracious demand for products, be they apparel, electronics or footwear. However, for some reason, investors don't get nearly as excited when stocks go on sale. In the stock market, a herd mentality takes over and investors tend to avoid stocks when prices are low.

The end of 2008 and early 2009 were periods of excessive pessimism, but in hindsight, were times of great opportunity for investors, who could have picked up many stocks at beaten-down prices. Last fall was arguably another good buying point and many deals still exist in the market today.

When It Hits Your Buy Price
In investing, it is important to estimate what a stock is worth. Then, investors will know whether it is on sale and likely to rise up to this estimated value. Coming to a single stock price target is not important. Instead, establishing a range at which you would purchase a stock is more reasonable. Analyst reports are good starting points, as are consensus price targets, which are averages of all analyst opinions. Most financial websites publish these figures. Without a price target range, investors would have trouble determining when to buy a stock.

When It Is Undervalued
There is a lot of information needed for establishing a price target range, such as if a stock is being undervalued. One of the best ways to determine the level of overvaluation or undervaluation is by estimating a company's future prospects. A key valuation technique is a discounted cash flow analysis, which takes a company's future projected cash flows and discounts them back to the present. The sum of these values is the theoretical price target. Logically, if the current stock price is below this value, then it is likely to be a good buy.

Other valuation techniques include comparing a stock's price to earnings multiple to competitors. Other metrics, including price to sales and price to cash flow, can help an investor determine whether a stock looks cheap compared to its key rivals.

When You Can Patiently Hold It
Assuming you've properly identified a stock's price target and estimated if it is undervalued, don't plan on seeing the stock rise in value anytime soon. It can take time for a stock to trade up to its true value. Analysts who project prices over the next month, or even next quarter, are simply guessing that the stock will rise in value quickly. It can take a couple of years for a stock to appreciate closer to a price target range. It would be even better to consider holding a stock for three to five years, especially if you are confident in its ability to grow.

When You Have Done Your Own Homework
Relying on analyst price targets or the advice of newsletters is a good starting point, but great investors do their own homework on a stock. This can stem from reading a company's annual report, reading its most recent news releases and going online to check out some of its recent presentations to investors or at industry trade shows. All of this data can be easily located at a company's corporate website under its investor relations page.

The Bottom Line
Legendary stock-picker Peter Lynch recommends that investors buy what they know, such as their favorite retailer at their local shopping mall. Others can get to know a company by reading up on it online or talking to other investors. Combined with the above tips, a common sense strategy to buying a stock can also be the most profitable.

Related Articles
  1. Investing

    Where the Price is Right for Dividends

    There are two broad schools of thought for equity income investing: The first pays the highest dividend yields and the second focuses on healthy yields.
  2. Professionals

    A Day in the Life of a Hedge Fund Manager

    Learn what a typical early morning to late evening workday for a hedge fund manager consists of and looks like from beginning to end.
  3. Mutual Funds & ETFs

    Top Schwab Funds for Retirement

    These Schwab funds are strategically designed and have performed well on a historical basis, meaning they're solid options for retirement.
  4. Mutual Funds & ETFs

    American Funds' Top Funds for Retirement

    Planning for retirement in this economic and investment environment is far from easy. American Funds might offer an answer.
  5. Technical Indicators

    Using Pivot Points For Predictions

    Learn one of the most common methods of finding support and resistance levels.
  6. Investing Basics

    5 Tips For Diversifying Your Portfolio

    A diversified portfolio will protect you in a tough market. Get some solid tips here!
  7. Entrepreneurship

    Identifying And Managing Business Risks

    There are a lot of risks associated with running a business, but there are an equal number of ways to prepare for and manage them.
  8. Active Trading

    10 Steps To Building A Winning Trading Plan

    It's impossible to avoid disaster without trading rules - make sure you know how to devise them for yourself.
  9. Mutual Funds & ETFs

    Best 3 Vanguard Mutual Funds for Retirement

    Discover the top Vanguard target-date retirement funds with target dates in 2020, 2030 and 2050, and learn about the characteristics of these funds.
  10. Investing

    What’s the Difference Between Duration & Maturity?

    We look at the meaning of two terms that often get confused, duration and maturity, to set the record straight.
  1. Does mutual fund manager tenure matter?

    Mutual fund investors have numerous items to consider when selecting a fund, including investment style, sector focus, operating ... Read Full Answer >>
  2. Why do financial advisors dislike target-date funds?

    Financial advisors dislike target-date funds because these funds tend to charge high fees and have limited histories. It ... Read Full Answer >>
  3. Can working capital be too high?

    A company's working capital ratio can be too high in the sense that an excessively high ratio is generally considered an ... Read Full Answer >>
  4. What licenses does a hedge fund manager need to have?

    A hedge fund manager does not necessarily need any specific license to operate a fund, but depending on the type of investments ... Read Full Answer >>
  5. Can mutual funds invest in hedge funds?

    Mutual funds are legally allowed to invest in hedge funds. However, hedge funds and mutual funds have striking differences ... Read Full Answer >>
  6. When are mutual funds considered a bad investment?

    Mutual funds are considered a bad investment when investors consider certain negative factors to be important, such as high ... Read Full Answer >>

You May Also Like

Hot Definitions
  1. Barefoot Pilgrim

    A slang term for an unsophisticated investor who loses all of his or her wealth by trading equities in the stock market. ...
  2. Quick Ratio

    The quick ratio is an indicator of a company’s short-term liquidity. The quick ratio measures a company’s ability to meet ...
  3. Black Tuesday

    October 29, 1929, when the DJIA fell 12% - one of the largest one-day drops in stock market history. More than 16 million ...
  4. Black Monday

    October 19, 1987, when the Dow Jones Industrial Average (DJIA) lost almost 22% in a single day. That event marked the beginning ...
  5. Monetary Policy

    Monetary policy is the actions of a central bank, currency board or other regulatory committee that determine the size and ...
  6. Indemnity

    Indemnity is compensation for damages or loss. Indemnity in the legal sense may also refer to an exemption from liability ...
Trading Center