4 Ways to Spot a Bad Stock

Everyone wishes they had a surefire way to pick stocks. While that is largely impossible, there are definitely some things to look for if you want to avoid bad stocks that will set you back.

Penny Stocks

Everyone knows someone who claims a friend of theirs made insane money investing in a penny stock.
Of course, you have never met this friend and you never will because those stories are usually urban legends.

The truth is that penny stocks are largely either scams, or just something as bad. In the former, you send money to some fake broker whom you will never hear from again. As for the latter, you invest in a real company that could not make it on a major exchange and is selling at that low price because it has absolutely no future or chance of providing returns.

Shares Outstanding Increases

Ideally, you always want to see the outstanding shares for your stock either staying the same or going down. This means there will be more money spread across those people who own shares. It could also signal a buyback program, which is always a good sign.

When you see shares outstandingly increasing, that means more investors are now involved with that stock. As such, potential returns are now more diluted.

It Resembles Other Bad Stocks

Hindsight only helps if you use it for foresight. To that end, if you are ever curious about a stock, try to compare it to other ones you remember from the past. Keep in mind, this does not always mean you should look for a similar stock in the same industry. Circuit City went out of business while Best Buy soldiered right on, despite the fact that they were very similar.

What you want to look for are companies that resemble each other in other important ways.
Are they making similar moves within their respective markets? Do their press releases express similar philosophies? Have they tried to expand similarly?

These comparisons are a good way to spot a stock that is worth your time or one that you want to steer clear of. Obviously, the more a stock resembles one that turned out to be a dud in the past, the more cautious you need to be.

The Hot Tip Everyone Has

Lastly, one way you can probably be sure a stock is not worth your time is if it is the hot tip everyone seems to have. This may feel counter-intuitive, but it makes sense if you think about it a bit.
How much can you expect from a stock if everyone is currently buying it because they hope to profit?

The only exception to this rule is with an Initial Public Offering (IPO) when that initial period of speculation may prove to be perfectly accurate.

While none of these tips are guaranteed to keep you out of trouble, they should help you stay away from any stocks that have no hope of pulling off a healthy return.

feature image credit: the diligent advisor

source credit: trendshare.org: should you buy penny stocks; investopedia: stocks investing tips

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