From Ken Little,
Your Guide to Stocks.
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Picking stocks is a lot like buying a new car - only different.

More accurately, the process of picking a stock is like the process of buying a new car.

You decide on what features are most important (good gas milage or high performance vs. long-term growth or a quick profit on a market shooting star), for example.

When you have gone through the list of important features and made decisions where features were in conflict (they don’t make convertible mini-vans), you are ready to find the vehicle in your price range that most closely matches your list of important features.

If you are a savvy shopper, you take your time and only buy when you can get the vehicle at a good price.

Picking Stocks

This is basically the same process investors use to pick stocks.

Are you looking for a growth or value stock; small, mid, or large cap stock; are you looking at a particular stock sector; are you looking to hold the stock for more than two years or less?

All of these questions and more go into the process for picking a stock.

When you finally narrow done the process to a stock or several stocks, it is time to decide how much to pay.

The Process

This can be the hardest part of the process, especially if you are investing in growth stocks, which by definition tend to rise in price.

The price earnings ratio is one measure that investors use to tell whether a stock is over bought (priced too high) or oversold (selling below its true value).

Along with other ratios, PE is used to arrive at a value determination for a stock.

Many analysts, however, favor the fair value or intrinsic value method of stock valuation.

The intrinsic method is very complicated and quite detailed, so most investors rely on companies like Morningstar.com to make those calculations for them.

Value Investors

Value investors, in particular, are fond of intrinsic value analysis because it helps them identify companies the market is valuing (based on the stock price) below the real or intrinsic value.

These companies often realize substantial long-term gains when the market correctly prices (stock price) the company relative to its intrinsic value.

So, how is picking stocks not like buying a car?

It is almost a guarantee that any car you buy will lose up to 20 percent of its value the minute you drive it off the lot (new cars).

Pick a good stock and you will have an appreciating asset for many years.

Of course, there are lemons among stocks just as there are among vehicles.