If buying a new stock or a stock with a very low price (i.e. $1 - $2), how does one determine value?

Answer 1

The way I evaluate a stock was learned by reading Buffettology. Warren Buffett's ex-daughter in law spells out the criteria he used to buy stock and also how he evaluated the price to worth. I used the formula and set up and Excel spreadsheet where all I need to do is plug in the number from the balance sheet. By the way MSN.com has all the information on the companies you need for free under print company report after you pull a quote on a particular company.

PS There is also a Buffettology workbook available...And this methodology is probably only going to work with established companies, so may not apply to penny stocks

Answer 2

Wow... there's a lot to it.

First of all, dealing with such low priced stocks is risky. The rule of small numbers is attractive and gains can fly off the charts. But there is a flip side to that coin. Also, there are countless dangerous stocks at that price, many of which are total scams. My advice is to NEVER by an over the counter stock. NEVER.OB

To determine value?... Most people look at fundamentals. Here's a good article on fundamentals.
http://www.investopedia.com/articles/fundamental/03/022603.asp

Basically, what you want to do is find something that is significantly undervalued. Fundamentals will help you recognize that. Once you recognize it's undervalued try to find out why. How's the management, product, outlook, company, sector, industry, political environment, earnings?. . . and countless other things.

Once you go through all that you have done your DD (due diligence). If you find that there is no real reason for the stock being undervalued, go for it; watch, be patient. But also be careful of market conditions. Right now things are looking very bearish (check investopedia for what Bull and Bear mean) which is bad for us all.

So in summation, go to investopedia and go nuts. Read everything they have. Hang out on financial message boards, understand everything before you invest. Paper trade (no money practice) with a few of your stock picks.

I'm leaving out a lot, but you will need to do more research before you invest (and risk) your money. Best of luck!

Answer 3

Obtain a copy of the balance sheet. Subtract liabilities from assets and divide net assets by total shares of outstanding stock. The result should equate to FMV price per share.

Answer 4

Gravyboat has recommended to you the best procedure, but unfortunately life is short.
What I do is to go for shares in large companies, showing high div. yield and a low P/E ratio.

Answer 5

Very carefully.