How Do I Buy Cheap Stocks?

How Do I Buy Cheap Stocks?
By www.ProfitableInvestingTips.com

http://profitableinvestingtips.com/stock-investing-tips/how-do-i-buy-cheap-stocks
The old adage for successful stock
investing is to buy low and sell high.

But, how do you buy cheap stocks?
Where do you find them and how do
you pick the most profitable ones?

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A couple of weeks ago we asked the
question, what is value investing?

Value investing should always be on
your mind when searching for cheap
stocks.

A simple approach to value investing
is to use a stock screening tool like the
one in Google Finance to find stocks
with low price to earnings ratios
(P/E ratio) or price to book ratios
and high dividends.

In short, what you are looking for are
stocks that are cheap in relation to
their current market price.

That is the focal point of intrinsic
value analysis.

Cheap Price High
Intrinsic Value

How to buy cheap stocks is to use a
stock screener.

A basic one can be found on Google
Finance.

Pick a high P/E ratio and look for
stocks that have lost market price in
the last year.

It may be useful to do a few separate
stock screens for high cap, mid cap
and low cap stocks.

Make a list of the stocks, their prices
and P/E ratios.

Stocks that have fallen in price in the
last year and have higher P/E ratios
should be high on your list when you
buy cheap stocks.

Once you have a couple of lists you
will want to look at intrinsic stock
value.

The key to determining intrinsic
value of stock is getting a clear idea
of the medium and long term
prospects of the business in question.

Successful stock investors learn to
judge how well a company will
manage its assets, products, costs,
R&D, and marketing.

When the picture is clear an investor
can make an informed decision.

If the market price is less than the
intrinsic value of stock it is time to
buy and if one owns the stock and the
prices are reversed it is time to sell.

Here is the original formula from
Benjamin Graham.

• Preceding twelve
months earnings
per share, EPS
• A constant of 8.5
representing an
expected price to
earnings ratio, P/E
ratio, for a
company that is not
growing
• g being an estimate
of long term growth
(five years)
• A constant = 4.4,
the average yield of
high grade
corporate bonds in
the early 1960
decade
• Y = The current
yield of AAA
corporate bonds
• V = intrinsic value

The formula is as follows:
V = (EPS x (8.5 + 2g) x 4.4)/Y

Divide V by the current market price
to get the relative Graham value,
RGV.

If the RGV is greater than 1 the stock
price is cheap in relation to its
expected earnings and if the RGV is
less than 1 the stock is overpriced in
regard to its forward looking
earnings.

What If I Just Buy Cheap
Stocks?

What if I just buy low priced stocks?
The efficient market hypothesis says
that all stocks are priced fairly
according to what is currently known
about the stock.

As such this theory says that there are
no cheap stocks in relation to market
value

A rule of thumb is that a randomly
chosen basket of low cap stocks
should include 40 stocks.

For more about this approach read
the book A Random Walk Down Wall
Street which reports that a group of
stocks chosen by throwing darts at the
Wall Street Journal NYSE stock
listing provided a better group of
winners than most fund managers.

How Do I Buy Cheap Stocks?

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