Beginners in the investing world may want to start with investing in cheap stocks to gain experience and skills before going all in, in stocks like Tesla, Amazon, Google etc.
There are times where the cheap stocks are very trash and will lose their worth in the near or long future. And the point with investing is to gain more money in the future and not to lose it.
And thats why this article is created, to help you choose cheap stocks which will gain worth in the near or long future. And Ive created for you a step by step process on how to choose the correct cheap stocks.
Step 1) Choose a stock screener
Here in the first step, you got to find a good stock screener. For these of you who doesn’t know what stock screener is then let me quickly tell you before we move on.
A stock screener is basically a set of various tools that will allow you as an investors to quickly and easy sort through the myriad of available stocks together with increasing exchange-traded funds according to the investor’s own criteria.
Most of online stockbrokers provides you with stock screener. But not all of them are good. The best and easiest ones to use are 1) Yahoo Finance, 2) TD Ameritrade, 3) TradingView, and 4) Finviz.
Stock screener allows you as a user to sort stocks by almost characteristic you may need, want or even imagine.
In stock screener allows you to input traits which you may sooner or latter want.
Some relatively basic criteria to Stock Screener are growth rates and value which makes it super helpful. The more advanced stock screeners will offer you more criteria and more customisation.
Step 2) Create a target for future earnings growth rate
Defining good companies may take times because there are many ways on how you can define a good company.
But for the most part a typical one criteria to define a good company is of course “how fast the company is growing”.
For the most part a quick-growing companies tend to be to more valued by investors.
On the stock screener, will step up for you a screen for a good company’s future earnings growth rate.
A good place to start for you might me around 10% annually over the next five years. And then increase it to 15% or 20% to have a look whats available. And for the record everything which is above 20% is very high and good for you as an investor.
And if it happens that the screener doesn’t have a screen for the future earnings growth then you might consider a screen for sales growth
And if the screener doesn’t have future earnings projections then have a look at the earnings or sales growth for the past five years instead.
Step 3) Use the P/E ratio to find potentially undervalued stocks.
When you got a list of these fast-growing companies. Then you might want to add another criteria. And that another criteria is inexpensive.
The inexpensive relates to undervalued stocks which in the future will gain value. And discovering undervalued stocks sooner before they go up will be a very profitable.
There are a lots of stocks which offer you a low price for every share. However in many case you might not get what you have paid for.
All it takes you evaluate the value of a stock, you as an investor will find yourself often with dividing the current price of one of its shares by its annual earnings per share. The result is called price-earnings ratio or simply P/E ratio.
Step 4) Focus on market cap to screen out risky companies
The whole stock screener tool should help you to find dozens of companies which are somehow cheap together with the financial analysts think will grow earnings well in the future.
There is a huge chance that you will end up with more companies than you will need at the beginning. Then you can set the minimum size of the company itself as it is measured by its market capitalisation. And it is to avoid riskier, and smaller stocks which might go down in the future.
Keep in mind that the smaller the market cap, the riskier the company.
If your list of companies is to big you might consider adding some extra criteria like.
- Increasing the minimum growth rate, to 15% growth or something bigger.
2) include only companies that pay dividends. This is a sign of a strong financial health to the company.
3) And the last thing is the stock screener which are trading near their 52-week low point. And this is to ferret out those that the market has soured on.