Understanding Investor's Business Daily's Stock Rating System

Personal investing seems like a perilous feat in this down economy, but gaining a little extra return on investment is more than possible for those who are willing to take the time to understand the stock market and how it operates. One of the best ways to learn about anything is to ask those who have gone before and already learned the ropes. The same is true about investing your money in the stock market. Investor's Business Daily (IBD) is an excellent resource for anyone who wants to get a good understanding of the market and the best opportunities in the market. This hub discusses some of the stock rating features complied by IBD staff that can help you grow your money in any economy.

Investor's Business Daily is a daily newspaper designed especially for those who want to invest their money through any market traded issues like stocks, bonds, and mutual funds. The investment newspaper offers many helpful tools for gaining pertinent information about the stock market including news reports, earnings reports, and tables.

The stock rating system designed and employed by IBD to rate the potential of a stock issue is one of the most helpful tools available for investor's to research and track corporations traded in the stock market. Essentially IBD rank each stock on five criteria including:

1. Earnings Per Share
2. Relative Price Strength
3. Sales + Profit Margin + ROE (return on equity)
4. Accumulation and Distribution
5. IBD's SmartSelect Composite

Earnings Per Share Rating

This Earnings Per Share rating compares a company's last two quarters and last 3-5 years of profit growth with all other companies. Each companies' earnings are then given a rating from 0-100 with 100 being the best. If a company lands a rating of 95, it means that they have higher earnings strength than 95% of companies. (IBD)

Relative Price Strength

The relative price strength rating follows each company's stock price changes over a 12 month period and compares them with all other companies. IBD says that the best companies to invest in rate 80 or above in both the earnings per share and relative strength categories.

Sales + Profit Margin + Return on Equity Rating

This rating combines recent sales growth, profit margins and return on equity in an A to E rating. In this category, A is the highest grade and E the lowest.

Accumulation/Distribution Rating

This indicator uses a price and volume formula to whether a company's stock is under accumulation (being bought) or distribution (being sold off) in the last 13 weeks. It also uses an A to E rating scale with A meaning the stock is undergoing heavy buying and E signifying that investor's are dumping it.

IBD's SmartSelect Composite Rating

IBD's SmartSelect composite rating combines all five IBD ratings into 1-99 rating scale. Those stocks that earn a 99 score are deemed to have the best overall strength for investment and thus the most potential for a fair return on investment in the immediate future.

Even though Investor's Business Daily's stock rating system is a very helpful tool for determining how to invest money in the stock market, potential investors should not think that this hub offers any guarantee that using IBD's system will assure financial success or positive returns on investment. Investing in the stock market has inherent risks and there is as much potential for losing money as growing your money.