- Avoid fad stocks. Once everyone is talking about their great stock purchase, no one is left to buy a popular stock and drive up its price. Krispy Kreme donuts are still popular, but the stock of the company that makes them appears to have lost its fans. Its price peaked above $50 in 2003, but in March of 2010, it was under $5 a share. Very unpopular stocks should usually be avoided, as well.
- Buy stocks with reasonable price to earnings ratios. P/E ratios indicate how much investors will pay for a company's earnings. If a company earns a dollar a share, the amount investors will pay for that dollar is the P/E. The P/E is the ratio of the stock price to the company's profits(earnings) per share. In many industries, a P/E under 13 means investors fear that earnings will decline. Over 21 or so, a P/E shows that investors are fervent fans. The safest stocks have P/Es between 14 and 20, showing that investors are neither frightened nor manic.
- Avoid risky industries. For example, small biotechnology stocks may crumble if a drug study fails. Large companies in the consumer sector, on the other hand, will likely continue to make money whatever the state of the economy may be. Utilities are another safe sector, where high dividends are usually secure. Large old companies in productive sectors of the economy are a conservative choice.
- Avoid cheap stocks. Everyone loves a bargain, but penny stocks-those that sell for under $5 a share-can be expensive mistakes; not enough information is available about such shares. Management may be unreliable, or too new to know their business. The prices of small stocks move erratically, too, so it is easy to overpay.
- Buy growing yields. Yield is the percentage of its price that a stock pays out in dividends. Fast-growing companies may pay no dividend, reinvesting any profits instead. Other companies reliably raise their dividends, as The Dividend Growth Investor website explains. Conservative investors should beware of most dividends over seven percent, which can indicate that the stock has crashed and the dividend will soon follow. High yields are tempting, but dividends in the three percent range are more reliable, and more likely to grow.
- Many investing websites, such as Marketwatch.com, display P/E ratios, yields, and lists of popular stocks. Other websites, like MSN Money, also offer stock ratings that include safety grades. On line brokerages feature ratings and evaluations of stocks for their customers. Stock safety information is also available to subscribers of stock rating services such as Value Line.
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