Stock Investing For Dummies®, 3rd Edition

Chapter 11. Using Basic Accounting to Choose Winning Stocks

In This Chapter

• Determining a company's value

• Using accounting principles to understand a company's financial condition

Successful stock picking sometimes seems like plucking a rabbit out of a hat or watching the Amazing Kreskin do some Houdini trick. In other words, it seems like you need sleight of hand to choose a stock. Perhaps stock picking is more art than science. The other guy seems to always pick winners while you're stuck with losers. What does it take — a crystal ball or some system from a get-rich-quick-with-stocks book?

Well, with the book in your hands now and a little work on your part, I think you'll succeed. This chapter takes the mystery out of the numbers behind the stock. The most tried-and-true method for picking a good stock starts with picking a good company. Picking the company means looking at its products, services, industry, and financial strength (the numbers). Considering the problems that the market has witnessed in recent years — such as subprime debt problems and derivative meltdowns wreaking havoc on public companies and financial firms — this chapter is more important than ever. Understanding the basics behind the numbers can save your portfolio.

Recognizing Value When You See It

If you pick a stock based on the value of the company that issues it, you're a value investor — an investor who looks at a company's value and judges whether he can purchase the stock at a good price. Companies have ...