After a lot of thought and research I finally settled upon a specific set of criteria to use while searching for stocks to invest in. While I do allow the occasional exception, for the most part this is how I locate stocks for purchase.

My Stock Market Black List

These are the reasons I pass up investing in a lot of companies.

• Index Funds and ETFs. If the market seriously tanks I’ll reverse my decision but for now I avoid them. I believe that they are currently overpriced.
• Non-dividend-paying stocks. My goal is to build passive income through dividends. With one exception (I’ll discuss this in a later post), I have avoided them.
• Stocks in the Finance Sector. Finance companies make money through loans or investing in groups of loans bundled up in packages. I have personal issues with the use of credit. I’m also honest enough to admit that I don’t understand derivatives and other financial jiggery-pokery well enough to make investment decisions in this sector so I am avoiding them entirely. If I learn enough to feel safe, this limitation will be lifted as well.

What I Search For In A Stock

• Companies with a history of paying dividends. A decade or more is preferred.
• Companies with a large volume of insider buying. If insiders are purchasing on the open market it is usually a sign that the stock price will go up in six months to a year. I don’t include stock options that have been issued in this analysis, though I do investigate further if an insider is selling a large amount of stock.
• Companies with a significant amount of major investors. I take note if I discover that the big dogs are scooping up shares. They have access to more information than I do so I like to ride on their coattails whenever possible.
• Companies trading for $5 a share or less. This is a budgetary restriction.
• Companies with excitement in the voices of their board members. I close my eyes and listen to their voices on their conference calls, noting the emotions. Any company that doesn’t display obvious hope or excitement for the future, who has board members that seem bored or disgruntled, are eliminated from my list. I do keep an eye on them, however. One company I recently invested in went from sounding hopeless to excited about the future as they described how they had managed to pay down millions in debt over the course of a single quarter. I jumped on that stock as soon as I noticed the change.

Since I am investing on an extremely limited budget I focus on companies that have fallen out of favor with investors. I search for companies that have reduced their dividends in order to pay off debt or expand their businesses. Investors hate companies that slash their dividends so this usually causes their stock prices to tank. Since major exchanges will only allow stock prices to go so low before they are de-listed, these companies are motivated to do whatever it takes to keep from slashing dividends further and will do whatever it takes to increase their stock price over time. I love locating companies that are reallocating dividend money to pay off debt. I take that as a positive sign of fiscal responsibility despite the fact that most investors disagree.

My criteria severely limits my stock selection but that’s okay. It’s a start. I’ll be able to lift some of the restrictions as I learn more and work out ways to increase the amount of money I have available to invest. It will just take time.

Do you have any specific criteria for your personal stock market investments? Please share your stories in the comments below.