Four Criteria For Deciding On A Safe Stock

Tuesday, February 7, 2012
By Faisal Laljee

Many investors shy away from a stock over a hunch or superstition. Fluctuations in the market, especially during this historically rough stretch for the American economy, can create massive investor insecurity. People are looking to shave off dollars from their bottom lines. They’re opting for a prepaid Mastercard over an endless credit line; they’re looking for savings; and they’re especially looking for smart stock moves and dividends. While there is no set criteria for making money on the stock market, these four criteria may help you prioritize your plays this year:

Defensive industries—These are non-cyclical stocks that are typically equity securities or companies that sell necessary products or services. They usually have stable sales even when consumers and investors are scaling back, simply because they are indispensable. They are known as defensive because they protect your overall portfolio even when the market is doing badly. Examples would be toothpaste, shampoo, condoms, alcohol, etc. Some stocks truly are recession-proof and these are stocks that can make good investments, especially if dividends are offered.

Low debt burden—A company’s debt to ratio plays a big role in whether or not it will work as a long term investment and can drastically affect a company’s credit rating. The debt ratio is determined by the total amount of debt divided by total assets. The debt ratio determines a firm’s debt burden and indicates the strength of its capital. Low debt isn’t necessarily the best indication of whether a stock is reliable though. You want a company for which debt indicates their ability raise money from lenders from whom they can get a better return. A good company with a low debt burden will profit from their debt.

Increased sales—If a company is able to bolster its sales in tough economic conditions you have a pretty good indication of its value. This isn’t necessarily the same as being a defensive industry, it may just simply mean that the company’s business model appeals to a certain trend in society.

Healthy dividends—Any time you have a protracted period of low inflation and low interest rates, investors will seek out dividends. These are payments made to shareholders when a company makes a certain amount of profit. Dividends make a stock vastly more attractive to frugal investors.

These four criteria overlap in many ways, but they all speak to the health of a stock and its ability to weather tough economic conditions and fluctuations in the market. Investors would be wise to pick their stocks based on one or more of these conditions.

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