Ask the Fool: Good Stock Signs

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 because you'll essentially be buying a piece of it - and its future. You should study its annual and quarterly reports, evaluating such things as 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.