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How To Pick Common Stock – The Rules You Need To Know

By Jason Markum

Anybody that suggests that investing in the stock market is easy is probably trying to sell you something! The fact of the matter is, investing in the stock market is tough. Make just one or two wrong moves and if you’re not careful you can wipe out years and years of careful savings and retirement safety in the blink of an eye.

But there are several things you can do to help stack the deck in your favor, and that’s part of what I’m going to talk about in this article today. Mainly I’m going to focus on how to follow the rules for picking good common stocks.

The first rule is to try and buy the stock of a company that is a clear industry leader. If you can’t afford the industry leader, at least try and get a hold of stock in a company that has a fairly important position within its specific industry.

The second rule is to try to find very specific industries that have limited amounts of competition. The less the competition the stronger the companies within that industry tend to be and the easier it is for them to make oversized profits year after year.

The third rule is to avoid industries, if at all possible, that are visible figures within the consumer price index or large players within a countries GDP, or gross domestic product. I’m talking about the auto industry, or the food industry, or the steel industry just to name a few.

These high profile industries are usually the first to go down during times of recession (by definition) and also are the companies that have a higher chance of being over regulated by the government. Over regulation almost always translates into lower profit and depressed stock prices.

The fourth rule is to look for companies that have a price to earnings ratio which is at least the same as or lower than the S&P 500 index’s price-to-earnings ratio. Sure, you may have a difficult time finding these companies, but they’re out there.

The fifth rule is to search for companies that have an extended history of paying out dividends, but not just paying them out; you are going to want to look for companies that have a history of increasing their dividends over time. Dividends are a very nice signal for stock price.

Finally, try to stay away from companies that are highly leveraged and hold a lot of debt on their balance sheet. Especially now in 2010, credit has dried up and the gravy train is over for many of these companies. Stock prices are beginning to reflect high debt burdens adversely so you’re going to want to stay away from these types of highly leveraged companies if at all possible.

So there you have six easy-to-follow rules for picking the best common stocks. As with any investment decision, be sure to do your own research and fundamental analysis of the underlying company’s performance before investing in any stock for the long run.

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