Motley Fool: Research stock bargains

Q: What are good signs for buying stocks? - R.S., Pittsburgh

A: If you're referring to the economy, it may seem counterintuitive, but a slumping economy can actually offer more stock bargains than an economy firing on all cylinders. In good times, stocks often get bid up beyond their intrinsic worth. In bad times, they can fall below their intrinsic value. There are bargains galore these days.

But not all stocks are alike. For any stock you're considering, you need to get to know the underlying company well, since you'll essentially be buying a piece of it - and its future. You should study its annual and quarterly reports, evaluating things like its debt load, profit margins, free cash flow and growth rates. Superinvestor Warren Buffett says he concerns himself with these questions when evaluating stocks: Can I understand the company? Does it have sustainable competitive advantages? Is the management exceptional? Is the price attractive?

Q: I keep reading about "points" in financial articles. What are they? - P.V., Telluride, Colo.

A: There are several different kinds of points in the financial universe. When securing a mortgage, in order to get a lower interest rate, you usually have the option of paying some points up front, each of which is 1 percent of the value of the loan. Indexes such as the Dow Jones industrial average or S&P 500 are often quoted in points, not dollars, even though their components may be stock prices. Finally, a "basis point" is one one-hundredth of a percentage point. So an interest rate that rises from 6 percent to 6 1/2 percent has advanced 50 basis points.

Fool Year Resolutions

Resolve to get a few important things done, and your financial future may end up much brighter.

Get your financial house in order. If you're paying off your credit card bills in full each month, then charge away. But if you're borrowing on cards and accumulating debt, you're putting your financial security in peril. Eliminate all your credit card debt as soon as possible. (Let us help, at www.fool.com/credit.) You can call your card issuer and try to negotiate a lower rate. Or take out a less costly bank loan in order to pay it off. You'll never be able to grow a nest egg when you're paying 15 to 35 percent per year on your plastic.

Vow not to buy any mutual funds without checking their five- or 10-year performance vs. the Standard & Poor's 500, a handy benchmark for the overall market. Most mutual funds underperform the market. Fund performance stats can be found at your library or at www.morningstar.com. You'll find other fund-evaluating tips at www.fool.com/mutualfunds/mutualfunds.htm.

If you've never bought stock on your own before, vow to make one stock purchase of a company whose products or services you know and love. Look around your home or office, or think about where you shop frequently. Some company names are sure to pop up - perhaps FedEx, Wal-Mart, PepsiCo or McDonald's. Do some research. Call the company and ask for a free investor's package, featuring an annual report, among other informative documents. You should do a lot of research before investing a lot of money, but starting now with a little is a good way to get your feet wet. For suggested companies, visit www.fool.com/shop/newsletters and www.betterinvesting.org.

Once you begin investing, keep learning more. Follow your holdings' news and developments at least quarterly. Track your performance. Invest for the long haul. Develop a strategy. Plan for retirement. And above all, don't forget to have fun. If you're not enjoying studying companies, stick with a simple stock market index fund. Details at www.fool.com/mutualfunds/indexfunds/indexfunds01.htm and www.indexfunds.com.