{"id":842,"date":"2022-06-29T19:41:46","date_gmt":"2022-06-29T19:41:46","guid":{"rendered":"https:\/\/www.wallstreetzen.com\/blog\/?p=842"},"modified":"2025-06-24T11:28:41","modified_gmt":"2025-06-24T11:28:41","slug":"how-to-know-what-stocks-to-buy","status":"publish","type":"post","link":"https:\/\/www.wallstreetzen.com\/blog\/how-to-know-what-stocks-to-buy\/","title":{"rendered":"How to Know What Stocks to Buy: What to Look at When Buying Stocks?"},"content":{"rendered":"\n

\u201cPrice is what you pay; value is what you get.\u201d<\/p>-Warren Buffett<\/cite><\/blockquote><\/figure>\n\n\n\n

The reason to buy a stock is no different than the reason you buy anything else, like toothpaste.<\/p>\n\n\n\n

If you run out of toothpaste and go to the store to get more, you\u2019ll pick your favorite brand and go pay for it.<\/p>\n\n\n\n

In this process, you\u2019ve decided that the toothpaste is worth more to you than the $3.50 you have to pay in order to acquire it.<\/p>\n\n\n\n

Value (what you get) > Price (what you pay\/give up)<\/p>\n\n\n\n

This is the basis for every transaction, including investments.<\/p>\n\n\n\n

Long-term, fundamental investors are looking for stocks whose value is worth more than their prices.<\/p>\n\n\n\n

As such, these are the 2 factors to consider when buying stocks:<\/p>\n\n\n\n

    1. Value (buy great companies)<\/li>
    2. Price (at fair or better prices)<\/li><\/ol><\/ol>\n\n\n\n

      Given these 2 factors, how do you know what stocks to buy?<\/p>\n\n\n\n

      When the value is worth more than the current price, we buy.<\/p>\n\n\n\n

      When the value is worth less than the current price, we sell.<\/p>\n\n\n\n

      This concept is relatively simple to understand, but it\u2019s much harder to put into practice (which is exactly why we built WallStreetZen<\/a>).<\/p>\n\n\n\n

      For instance, is Tesla (NASDAQ: TSLA<\/strong><\/a>) at $735.19 a good buy?<\/p>\n\n\n\n

      That\u2019s the real question.<\/p>\n\n\n\n

      We’ll break it down below.<\/p>\n\n\n

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      Price<\/span>: What to look at when buying stocks?<\/strong><\/h2>\n\n\n\n

      Stock prices are basically meaningless.<\/p>\n\n\n\n

      Sure, once you\u2019re the owner of a stock you will want the price of the stock to increase – that is, after all, how we make money as investors.<\/p>\n\n\n\n

      But before you\u2019re a shareholder, the price of the stock does not necessarily mean anything to you, at least on its own.<\/p>\n\n\n\n

      When you\u2019re trying to determine what stocks to buy, you should not pay attention to a company\u2019s price per share.<\/p>\n\n\n\n

      Market Capitalization<\/strong><\/h5>\n\n\n\n

      Market capitalization (aka \u201cmarket cap\u201d) is the current value of a company.<\/p>\n\n\n\n

      \"\"<\/a><\/figure>\n\n\n\n

      If stock ABC has a share price of $10 and stock XYZ has a share price of $100, which company is worth more?<\/p>\n\n\n\n

      Your instinct may be to say XYZ, but what you should be asking is how many shares are outstanding?<\/p>\n\n\n\n

      Stock ABC has 1 billion shares outstanding, meaning the company\u2019s market capitalization is $10 billion ($10 per share x 1 billion shares), while stock XYZ has just 1 million shares outstanding, giving it a market cap of just $100 million ($100 per share x 1 million shares).<\/p>\n\n\n\n

      In reality, the market cap is the real price you\u2019re paying when you buy a stock, not the share price<\/strong>.<\/p>\n\n\n\n

      So while TSLA<\/a> may be trading for $735.19 per share, Tesla’s market cap<\/a> is $763 billion, which is the real price we would be paying if we were to invest in its shares today.<\/p>\n\n\n\n

      Value<\/span>: What to look at when buying stocks?<\/strong><\/h2>\n\n\n\n

      What should we look for when buying stock of a company? <\/p>\n\n\n\n

      Specifically, how do we measure a company\u2019s value?<\/p>\n\n\n

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      This is where it really helps to have a powerful fundamental analysis platform like WallStreetZen<\/a> (and its Zen Ratings<\/strong><\/a>)<\/p>\n<\/div>\n <\/div>\n\n\n\n

      While each investor\u2019s exact process is unique, there are multiple overlapping categories that can help you identify the highest-potential stocks:<\/p>\n\n\n\n

      \"\"<\/a><\/figure>\n\n\n\n
      Relative Valuation Metrics<\/strong><\/h5>\n\n\n\n

      The most common way to value a stock is by using relative valuation ratios.<\/p>\n\n\n\n

      These ratios can be used to compare stocks with different share prices, earnings per share, and across industries.<\/p>\n\n\n\n

      Remember, these ratios don\u2019t necessarily signal a good stock to buy on their own. Rather, they indicate companies which are being valued either higher or lower than other companies.<\/p>\n\n\n\n

      For example, TSLA<\/strong><\/a>\u2019s P\/E of 84.44x indicates Tesla is being valued much higher than Ford (NYSE: <\/a>F<\/a><\/strong>), which has a P\/E of 12.95x.<\/p>\n\n\n\n

      This doesn\u2019t necessarily mean TSLA is a buy and F is a sell (or vice versa), just that investors are willing to pay a much higher price to own part of Tesla than they are to own part of Ford.<\/p>\n\n\n

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      Zen Ratings<\/a> distills 115 factors that form stable growth into simple, easy-to-read letter scores. For instance, the value rating<\/p>\n