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How can you find great stocks to invest in? A good starting point is to simply pay attention to where you spend your money. What products or services do you like? Are you loyal to a certain brand or not? It is generally preferable to focus on companies whose products or services you buy regularly regardless of your income - products that are "recession-proof". So let's suppose during your shopping you buy some products from Johnson and Johnson - does that make it a good investment? Here's the initial questions I would ask myself and the other things I would look for - the first steps...
The very first question is, "Can I understand what this company does to earn profit?" If I can't understand what the company does, I move on and won't invest. JNJ has been in business for over a century and they provide various health care products. The area most people are familair with is their consumer brands - from Band-Aids to Listerine, but JNJ also operates in other segments including pharmaceuticals, medical devices, and diagnostics - all relatively understandable businesses.
The next thing I look at is the company's earning and dividend history. You can usually find this information online in the annual report. If you look for the "10-year financial summary", you can get a quick snapshot of how earnings and dividends have fared over the prior decade. Many companies will also offer bar graphs near the front of the annual report showing how earnings and dividends have done over the previous 5 years.
With earnings and dividend history, I am looking for companies that have managed to increase these financial measures without any huge decreases - the idea that "slow and steady wins the race". Consistancy is a huge plus.
I might check to see if the company I'm interested in is a dividend aristocrat (at least 25 years of increasing earnings). This can be done by Googling "dividend aristocrats" and looking at the list of member companies. A quick look at JNJ reveals 47 consecutive years of dividend increases - a pretty good long-term track record.
Finally, I usually like to make sure I am not paying top dollar for the shares - I want a bargain! So I will usually go to Google Finance and see how the stock has traded over the last year or so. I generally prefer to buy a stock trading closer to its 52-week low rather than its high. In order to get deals, I've often found that it's useful to look for "bad news" that is temporary, but drives down the share price and gives me a bargain. With this approach, I usually don't reap fast profits, but over time the strategy has been very effective for me. The other benefit of buying dividend-paying stocks when they're cheap is that you you get a higher dividend rate - which allows you to earn more income - and dividend income is what gave me early financial freedom.
Once the simple preliminary checks have been done, it's time to look at the stock more closely - which will be the focus of the next issue.
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